IPOs excite the Indian investor. It brings forth a range of emotions that move from greed to indignation. Everyone seems to want a ‘safety’ net. And if possible, a minimum guaranteed return too. And everyone wants the regulator to put this in place. In other words, they want an ‘assured’ fail safe product.

Why is it that we always seem to be upset with financial products only? We never seem to have that indignation or anger when we are conned by a builder in to buying a house, of which we NEVER will know the ‘carpet’ area? Or we buy an expensive car or television and based on sales quotas, the dealer gets an expenses paid holiday in Hawaii? If we see a mutual fund distributor taking away half a percent, we go in to rage.

Everyday, we buy things from apparel to mobile phones to daily vegetables. We do not bother about who makes how much in these. We accept meekly the spending of most of our money and moan about a discretionary outlay, on which there is no compulsion.

An investor has a choice of whether to apply or not in an IPO. The seller quotes a price at which he is selling. No one forces the investory to buy. Under such circumstances, what is the justification for seeking any protection? After all, share prices are something that keeps moving. Valuation is like a beauty contest. What is ugly to your eyes, may be pretty to me.

In this context, I do not even understand why SEBI or any regulator should bother about pricing? Their job is to ensure compliance with disclosure. And if there is wrong doing, then they should haul up the promoter, banker, lawyer etc over hot coals. So long as they do that in an exemplrary manner, no one bothers. For example, if after so many years, it has been discovered that a promoter lied in the prospectus of an IPO, the solution is to put him behind bars for a very long stretch and monetarily penalise him to the extent of the issue size at least. And also dob the legal firm that signed off.

Yes, the stock market is a constant cat and mouse game. Investors vs brokers vs bankers vs promoters. The retail investors are the goats who get slaughtered, but no one forces them to go there. Of course the regulator aids in the slaughter by having IPO rules that clearly work against the investor.

SEBI’s omissions include, among other things, the following:

  1. The prospectus is in an incomprehensible format. I would rather that all the legal details etc are given to SEBI, and the public have a document which is brief and telling;
  2. The timeline between the clearance of the document and the launch of the IPO does not leave time for any analysis. There should be a ten to fifteen day gap AFTER publication of the FINAL offer documents;
  3. Nowhere is it clear to the public about what is the nature of the business that the IPO represents. For example, the recent CCD issue was of a holding company that had many business interests. However, the marketing was done as if it is of a consumer company and focus was only on the CCD chain. This is absolutely misleading. I can understand that the bankers will hide things, but they do so only with explicit support from the regulator;
  4. The promoter’s related party businesses are hidden inside. For instance, in the Indigo issue, there are over 50 entities that are related parties and where promoters have interest. This is like a sieve for the profit and loss account in the future and should have been a highlight of the issue. It is not enough to publish the ‘risk’ factors like a laundry list, with obvious and supefluous ones;
  5. The average acquisition price per share by the promoter, ESOPs granted to key people in the run up to the IPO should be readily available;
  6. Exits by promoters in the IPO offering should be in BOLD print;
  7. A summary valuation of the company once the IPO is through should be in bold print.
  8. Subsequent material changes- Like the erosion of networth in the Indigo affair should have made the regulator pause- relook at the entire thing. The draft RHP documents gave us no clue and we had to depend on press reports!! This is patently unjust and unfair.

Of course there are many things the regulator can do. However, the old saying is that ‘Wall Street writes the rules’. The fact that we still struggle with rules for governance or IPO norms or disclosure norms after more than a century of stock markets, is testimony to that.

So, IPO or secondary markets- Stocks are like anything else you buy and sell. It is ALWAYS, ‘Caveat Emptor’.

(This appeared in the Deccan Chronicle of November 15/16)

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