(This column appears in the Deccan Chronicle)
The IPO floodgates are opening. As I write this, nearly two dozen offerings have got their approval from SEBI and are yet to hit your pockets. I have always advocated that people stay away from IPOs. Our secondary markets offer better information and more attractive options.
Today, companies come in to pick our pockets after they reach some size and profits. Pricing is at its most aggressive because the promoter would naturally like to maximise his ‘bang for the buck’. He is not concerned with you as a ‘future’ shareholder. You are simply a vehicle for his aggradisement.
Even if you find a rare promoter who thinks that future shareholders are important, unless he is alone, he cannot push a fair pricing. Today, every new business is backed big time by Venture Capitalists (VC) and Private Equity (PE) funds. The VCs and the PEs are managed by managers who get a profit share on the investment returns made by the fund. So they push very hard. For them, exit matters and not what happens after the exit. This early investor cannot be blamed for his approach. After all, as Gordon Gekko said, “Greed is good”.
The other key element in ensuring nothing left on the table for the IPO investor is the “Merchant” banker or the “Investment” Banker who is supposed to ‘manage’ the IPO. Each one of them has got almost identical capabilities, since they all go to the same set of institutional investors (who form the key IPO subscribers) and hence they generally get the mandate based on how high an IPO price they can extract from the investors. Do not go by fancy statements about ‘anchor’ investors etc. These are all a part of the crony capitalism of the capital markets.
I fail to understand as to why any sensible institutional investor would go for an IPO with a ‘lock-in’, when he has far more attractive opportunities in the secondary markets. Surely, this is cronyism at work. I fail to understand why an open-ended fund can justify putting its money in to a product with a ‘lock-in’? Seems like one hand of SEBI does not know what the other hand is doing.
The other big gap is that when an IPO hits the market, we do not have any information on the company. No one can go through the voluminous document that is known as the ‘prospectus’ in the time window between announcement and opening of an IPO. And it is impractical to expect someone to go through the SEBI website and go through every offer document that is filed and keep your memory alive. And the abridged document or the advertisement for the IPO is a joke. You do not know the business, you do not know the past financials, there are no projections, there is nothing. Only the ‘paid’ campaigns of the company where they get to put some ‘subscribe’ opinions get published miraculously in one to two days of the offer being announced.
The process is opaque. SEBI has still to get its act together on the IPO process. A proper statutory offer letter kind of a simple things are needed. A web link that is publicised should give the abridged kind of a note on the company. The background of promoters, the business prospects etc are important. In buying a secondary market we have every tool at our disposal to evaluate the proposal. In an IPO, we have nothing. The system is geared to push through these without any gate-keeping. A SEBI approval of an IPO means nothing to us as investors. If it did, we would not have so many vanished companies. Nor shares that have lost most of their listing values.
So, is this a risk that is worth taking? I guess it depends on what you are in it for. We generally see a very high volume of trading on the listing day. Clearly, it tells us that most of the money that goes in to the IPO is money looking for a quick buck. Given the momentum in the markets, it is likely that most IPOs will list at premium. However, I suspect there will be not many great buying opportunities. If you are a compulsive IPO investor, this is not a bad time. Enough time is on hand to find out about the company and take a call on listing as to staying invested for longer than the close of the listing day. From what I have seen so far, I would not include any of the companies in my long term bucket list.