Rampantly rising realty brings us to the rush of IPOs and follow-on issues at unrealistic prices. Indian companies have raised Rs55,000 crore from the primary market in the September 2009 quarter, says the Centre for Monitoring Indian Economy; 20 more companies had filed red herring prospectus before 30th September to raise Rs21,000 crore, says Prime Database.
Most of these issues are over-priced; what is worse, the money will not go into business growth but to pay off expensive debt or reduce the leverage of the company. Many issuers are part of groups that are notoriously involved in the stock-price manipulation game. In fact, but for the ferocious surge in stock prices in the September-October period, shares of many companies that raised public funds at the peak of the previous bull run were quoting at a discount. In fact, when the BSE recently launched its IPO index, it found that many high-profile issues of the past two years were trading below their issue price. These included Reliance Power, NHPC and Raj Oil Mills. Clearly, there were plenty of vested interests in the incredible secondary market surge that took the Sensex from 15,689 to 17,231 from 4th September to 14th October.
Here, too, Deepak Parekh is on record saying that many recent IPOs were over-priced and that “companies raising money need to leave money on the table for investors.” Importantly, many independent financial advisors (the smaller ones that are not connected with banks, investment banks, mutual funds and brokerage houses) are advising customers to stay away from IPOs and point out that most shares can be purchased on dips after listing. In that case, which retail investor is buying expensive IPOs? Our guess is that these shares are being stuffed into the accounts of portfolio management customers by unscrupulous money managers, just as dubious mutual fund managers will pick up expensive IPOs because of their nexus with promoters, investment banks and brokerage firms. They might get away with it too; because investors seldom ask questions.
Tailpiece: SS Tarapore, former deputy governor RBI, is among the few who write powerfully with a colourful turn of phrase. Writing in The Hindu, Mr Tarapore has joined many of us in raising a voice against the mindless implementation of KYC norms by banks, telecom companies and capital market intermediaries. He says KYC (know your customer) does not stand for ‘Kill Your Customer’. He says that banks and institutions have unleashed ‘a reign of terror’ on ‘innocent customers’ in medieval/colonial punitive retaliation for regulatory action that may have been initiated by the RBI for previous lapses.
Mr Tarapore asks for sensible, action-oriented committees to be formed to find a practical solution to the problem. We agree. One cannot wait until Nandan Nilekani’s Unique Identification Number is finally available for all Indians. The voter card and PAN card experience tells us that Mr Nilekani will have to face more teething problems than he had ever imagined.