The saga of Indian initial public offerings (IPOs) since liberalisation in 1991 resulting in free pricing on the back of 100% book-building has the leitmotif of vaulting ambitions of promoters. The cryptic comment — I will not invest now — by Envision Capital’s Nilesh Shah says it all. He said this after paying eulogy to Honansa Consumer brands and their future. But the caution he advocates is often not heeded by the investors who are taken in by the "future-is-bright" sales pitch of the promoters and merchant bankers.
Shah has been intelligent enough to read the financials with a fine tooth comb. Honansa Consumer, the parent of Mamaearth brands of consumer products, reported a loss of ₹ 428 crore in 2020, followed by a loss of ₹ 1332 crore in 2021 and turning the corner in 2022 with a feeble profit of ₹14.44 crore on a turnover of ₹114 crore, ₹472 crore and ₹964 crore respectively. Shah’s implicit advice is —don’t rush though angels might have trodden!!
The Indian IPO saga is a story of guileless but ambitious retail investors unwittingly performing the role reserved for venture capitalists.
Small wonder, the Honansa Consumer issue got a lukewarm response from the small investors who have become wiser after tasting listing losses when their sights were trained on listing gains. The retail category was oversubscribed just by 1.35 times.
That the issue price of ₹324 was high is borne out by Friday’s (November 10) going below the ₹300 mark with the scrip steadily going downhill after flattering to deceive with a small listing gain of ₹330 on debut at the bourses which is the only place where true worth can be found over a period of time.
The Indian IPO since liberalisation has shown Qualified Institutional Buyers (QIBs) falling head over heels to subscribe by the sales pitch made by the merchant bankers.
There is also something to be said about our IPO cum offer for sale (OFS) regime under which the promoters and venture capitalists ride piggyback on IPO to feather their own nests. The mandate to merchant bankers seems to be to ramp up the issue price for a hefty fee so that the promoters too could unload a substantial part of their holdings in what critics say is a conflict-of-interest situation.
The poor retail investor is often left holding the can and may have to bide their time before the shares soar on the back of good performance and financials. QIBs have deep enough pockets to take the hit on their chins.
Obviously, the SEBI’s initiative in ushering in IPO reforms have been limited and feeble. Footfalls do not translate into sales in swanky malls. Similarly eyeballs registered in an IPO-bound company’s websites don’t mean much contrary to what the SEBI feels in this regard. It is evident from its directive to disclose this trivia in the offer documents of new age companies (euphemism for losing companies) with a bright future.
Roots and branches reforms are called for lest IPOs become the easiest get-rich-quick scheme. Bank borrowings are the next best for the ambitious who smugly assume that the tag of wilful defaulter might stick but not hurt.
OFS must be decoupled from IPO, period. Merchant bankers must be made to have skin in the game by mandating minimum investments by them.
Underwriting too must be made mandatory. Both of them would go slow on gung-ho pricing secure in the knowledge that at the end of the day they may have to pay with dud shares for their collaborative role with the promoters.
In May 2018, the SEBI dismantled two seemingly retail-investor friendly regimes—rating of IPOs and voluntary safety net. While the first was inane what with the raters asked to maintain a studied silence on the issue price, the second could have been converted into a mandatory safety net scheme.
Voluntary disclosure schemes under tax laws don’t work. Likewise, a voluntary safety net scheme under which promoters were obliged to buy at the issue price a maximum of 1000 shares from retail investors should the market price go below the issue price within six months. That would bring about a modicum of sobriety to fixing issue price or fixing the price band.
—The author,S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
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(Edited by : C H Unnikrishnan)
First Published: Nov 10, 2023 5:04 PM IST
