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India’s IPO mart has changed; what hasn’t is investor greed

The story of India’s IPO market is one of transformation from abundant malpractices that plagued the primary market before Sebi came into being in 1992 into a much transparent, popular mart after Sebi enacted a plethora of regulations and plugged the loopholes, triggering a complete makeover.

My own tryst with the IPO market began in 1977, when Reliance, then a textiles company, offered its shares to the public. What resulted in greater interest were the FERA issues in that decade, after the Janata government forced MNCs to dilute their equity by issuing shares to the Indian public.

Scores of such companies including Ponds, ColgateBSE 0.33 % and Hindustan Lever hit the market at incredibly low prices determined by the then CCI or Controller of Capital Issues. While short-term invest

ors reaped a bonanza. This was the first spread of equity cult in India.

Of course with each profitable listing, demand for fresh IPOs grew phenomenally, leading to extremely huge oversubscriptions, thus reducing the exercise to a lottery-kind system. The era of multiple applications and fraudulent applications began in order to obtain more allotments. (Many years later, there was the IPO demat scam in 2005, where thousands of fake depository accounts were opened by some fraudsters to increase allotments).

The 1980s saw the first IPO boom, with hundreds of companies tapping the market, most of which were poor quality issues. The worst came during 1992-1996, when an unbelievable 3,911 equity IPOs hit the market. A large number of these were from ‘fly-by-night’ operators. The Sebi had just been set up, pricing controls had been removed and lack of proper regulations and infrastructure facilitated this huge fraud on investors.
Let us examine some the key areas of transformation, brought about mainly by Sebi primarily to ensure investor protection.

Entry Norms: Those days, just about anyone could think of doing an IPO and then even launch it within a short period. Over the years, Sebi has experimented with several entry norms, and among other strict entry norms, it now requires a track record of Rs 15 crore of profits over the previous three years. Non-conformity with this norm requires ggreater skills to cull out meaningful information. A fallout of this was the overgrown size of the abridged prospectus meant for retail investors, as the size of this too became 100-plus pages. Last year, Sebi redesigned the abridged prospectus to ensure that it does not exceed 10 pages and is in a reader-friendly font and layout. Now, each draft prospectus is also released to the public for its comments before Sebi gives its clearance.

Risk factors: In those early days, prospectus used to carry issue highlights, and that too on the cover page; and the same were carried in advertisements too. Issuers could get away with any kind of highlights. A good reform was to substitute these by risk factors, which however assumed ridiculous dimensions over time, and had to be shifted to many pages inside the prospectus. With almost everything being described as risk, this section has lost its meaning significantly. However, what has surely helped are the upfront discclosure of all indictments, court cases and other liabilities as risk factors.

Advertising: Those days, issuers would get away with any kind of advertising – tempting headlines, use of models and celebrities and promise of a bright future, including even assured dividends. The Sebi advertising code banned all of this. Now advertisements cannot use any model or make any forward-looking statement. In fact, the contents have to conform to the disclosures made in the

Now advertisements cannot use any model or make any forward-looking statement. In fact, the contents have to conform to the disclosures made in the prospectus.

Institutional role: Those days, almost all issues were aimed at only retail investors, who more often than not became individual venture capitalists, taking huge risks. This was transformed by the introduction of the category of qualified institutional buyers, comprising mutual funds, insurance companies,

FIIs and the like. Half of all IPOs are reserved for them, with another 15 per cent reversed for HNIs and only the balance 35 per cent left for the retail. Moreover, introduction of anchor investors now gives public investors some comfort on the issuer company and offer price.

Better indicator for retail investors: Those days, retail investors were lured into IPOs by stories of grey market premium and high ratings by some investment journals. Now, they have the

Now, they have the comfort of some indirect pointers, mainly institutional demand in IPOs. Here too, in the initial years, institutional players used to put in huge orders on the opening day creating an impression of substantial interest and, thereby, tempting retail investors into applying, and then withdrawing or downsizing their applications later. Sebi has since disallowed withdrawal or downsizing by institutional investors.

Application money and refunds: Those days, one could apply using a cheque or a demand draft, and even cash, and stand in long queues outside few designated bank branches to submit IPO application forms. It used to take several days to reconcile the data, and hence the float would be kept with the issuer on which he would enjoy huge interest. In oversubscribed issues, refund warrants would be mailed back to millions of unsuccessful investors, and many of them used to get lost in transit, leading to huge investor complaints. With the Gone are also the days when every issuer had to wastefully print lakhs and crores of application forms. Now an investor can apply from the comfort of her home.

Allotments: In those days, there was a complicated system of share allotment for retail investors, and it was open to manipulations. Later, proportional allotments were introduced, but this led to even the few successful applicants getting a very tiny number of shares. Sebi has now prescribed a minimum reasoable allotment. For institutions, there was the questionable discretionary allotment system, where the issuers and investment bankers could actually oblige their preferred institutions. This has now been changed to proportionate allotment for them too. Moreover, a very strict KYC regime has eliminated the chances of a 2005-like demat scam.

Electronic shares: In those days, shares were allotted in paper form. This not only gave rise to several malpractices like forg

ed certificates, but also entailed huge costs and delays in subsequent transfers. Now, shares can be issued only in electronic form and settlement is done on a T+2 basis.

Issue objects: Those days, almost all IPOs were to part-finance some kind of projects. Now, in most cases, the initial financing is done by PE/VC firms and more and more IPOs are for providing an exit to these investors. Other major issue objectives now include raising working capital, debt retirement and general corporate purposes. Gone are the days of IPOs funding greenfield projects; now are the days of seasoned offerings.

Pricing: Those days, one would have only fixed price IPOs. Now, in all issues, price discovery takes place through the book-building process (though within a price band of 20 per cent).

Stock Exchanges: In the 1980s, India had as many as 23 stock exchanges, with BSE on the lead. Every IPO had to, by law, list on at least one regional exchange, leading to assured business for all exchanges. There were a lot of malpractices with these broker-run exchanges. The securities scam of the early 1990s hastened the design of an automated exchange – NSE. BSE soon followed suit by going electronic. But the regional exchanges could not update their technologies and also lost on compulsory listings, leading to their closure. Now, there are just two exchanges with nationwide terminals.