In recent times, most of the so-called Initial Public Offers or IPOs have in fact been IPO cum Offer of Sale or OFS, with the latter more often than not predominating. Roughly 80 percent of the amount raised has been vide OFS. Retail investors pay little heed to this subtle nuance because for them the price at which shares are allotted on price discovery through the 100 percent book building exercise is the same. This is OFS riding piggyback on IPO.
There is another variant of OFS which was permitted by the SEBI in 2012. Under the SEBI scheme, the promoters of the top 200 companies in terms of market capitalisation can offer full or part of their holdings to Qualified Institutional Investors (QIIs) through the online bidding process subject to 10 percent of the shares on offer being reserved for retail investors i.e. those investing less than Rs 2 lakh. Twenty-five percent of the offer is reserved for mutual funds and insurance companies. This is a standalone OFS.
There can be no objection to a standalone OFS as it is a transparent bidding mechanism which is why it has been favored by the central government in its disinvestments exercises. But OFS that rides piggyback on IPO raises the hackles of the discerning. They wonder why a company should front for its promoters, be they venture capitalists or private equity investors or individuals who to be sure might have nursed the company through its infancy and the difficult gestation period. If the lion’s share (80 percent in recent times) of the IPO-cum-OFS is going to go into the coffers of the promoters with the company itself getting very little (20 percent in recent times), it is a misnomer to call these IPOs.
The façade of IPO
in what actually is an OFS exercise is to take advantage of the aggressive bidding by QIIs under the 100 percent book building route. Time was when the Controller of Capital Issues (CCI) would allow premium on IPO grudgingly even to the most profitable company.
To be fair to its successor, the SEBI, the premium can be charged only by companies with a good track record of profitability subject to the condition that if they plump for the 100 percent book building route, profit or loss doesn’t matter so long as the price is discovered by the QIIs. Given this latitude to 100 percent book building, there is in fact a perverse premium on losses in the manner of ugly being beautiful in the eyes of a car designer in Arthur Hailey’s eminently readable novel The Wheels. In the QII worldview piled up losses are harbingers of profit ahead provided the product or service is unique or futuristic. Be that as it may.
What QIIs do is their business but what is worrisome for the retail investors is they have to willy-nilly follow them pied-piper like if at all they want to get allotment in an IPO. With aggressive bidding coming to characterise our IPO-cum-OFS exercises, the promoters unloading their shares under OFS laugh all the way to their banks.
There is a disquieting view that QIIs are to the primary market (which triggered the still-born Angel tax) what Foreign Portfolio Investors (FPI) are to the secondary market. Both are often suspected to be the money launderers to dubious Indian promoters. QIIs bid aggressively so the promoters for whom they are fronting can exit at huge profits in a manner of self-fulfilling prophecy. Retail investors applying for shares in the hope of cashing in the listing gains often bite the dust. They become sacrificial pawns.
It is time for the government to rethink its extant IPO policy that is lapped up more by promoters rather than by companies. Promoters should not be allowed to ride piggyback on IPOs. They should instead enter the unchartered waters themselves without holding the IPO crutch.
In others words, OFS should not be dovetailed into an IPO. Both must be standalone exercises. Ideally, IPO should follow OFS after a decent interval so that the former is not an exercise in whistling in the dark. There is a view that OFS is better than IPO because since it happens outside a company’s books of accounts, it dilutes neither the book value per share nor the earnings per share (EPS). But a moment’s reflection would show that this is a mixed-up worldview. IPO is a fund-raising exercise whereas OFS is a disinvestment exercise. The two should be separated and compartmentalised.
—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 : Ajay Vaishnav)