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Moneylife » Investing » IPO » Facebook IPO highlights the ills of IPOs that has also repeatedly fooled Indian retail investors

Facebook IPO highlights the ills of IPOs that has also repeatedly fooled Indian retail investors

Debashis Basu & Aditya Govindaraj | 23/05/2012 07:00 PM | 

Facebook’s iconic IPO, the fifth largest ever got listed and then sank like a stone. It now appears that small US investors have unwittingly been made fools of by the media, the company and intermediaries. For Indian IPO investors, all this too familiar

The Facebook IPO is now looking like a scam and fit for SEC (Securities and Exchange Commission) investigation according to market expert-turned writer Henry Blodget, who himself was in the thick of the last internet scam. Apparently, in what is called “selective dissemination” of Facebook’s future earnings, its lead underwriters, namely Morgan Stanley, JP Morgan (who had recently lost $2 billion) and Goldman Sachs, had warned its institutional clients ahead of its IPO that Facebook earnings would be dampened down a bit. In other words, the small investors did not know what the big investors knew, and were put at a severe disadvantage, without them even knowing about it. According to Henry Blodget, “selective dissemination” of this sort could be a direct violation of securities laws. Irrespective of its legality, it is also grossly unfair. It is interesting to note that Blodget was part of a similar deal, back in 2000, during the heydays of the internet bubble. He has since been debarred from the securities market, but has been vocal against this scam that is unravelling and shaking up America.

Ironic, that it has all the ills of a process that has ultimately alienated small investors in India, something that Moneylife has been pointing out. In this case, the media was hyping the IPO up for months what with talk of hackathons—where Facebook techies wearing hoods conducts coding sessions to develop applications. Like Google, its hackathons have attracted hundreds of programmers, eager to earn their riches (and be the next Mark Zuckerberg), by developing applications and software for its platform that will garner more users. The media showcased this so called “cool culture” that is part of the Silicon Valley, and advertisers saw the potential of Facebook as a platform.

With so much frenzy that surrounded Facebook, pundits were talking about future earnings estimates reaching billions of dollars, increased user base and such. Obviously, this hype was designed to lure retail investors. The lead underwriters and Facebook gathered enough momentum during the IPO roadshows and hackathons. 

On 9 May 2012, it released what is called S-1 filing with the SEC, to reflect lower future estimates. Theoretically, this should reflect on its IPO pricing. However, Morgan Stanley and Facebook did not revise their IPO price in the light of this event, having garnered enough retail investors for institutions to dump institutional investors’ shares on the opening day.

So what happened on the opening day? The stock opened, zoomed up, and the biggies dumped their shares on hapless retail investors who knew little about the revised future estimates.

In the light of these discoveries, the stock crashed. Many retail investors are holding the stock which is now way below its IPO price. It now appears that the big guys sold out making millionaires of even those who have joined Facebook after 2009 and make Bono richer by $1.5 billion. Facebook’s founder, Mark Zuckerberg coldly sold 30.2 million shares and director Peter Thiel sold 16.8 million shares according to securities filings, making them insanely rich.

It is also pertinent to note that Nasdaq, the exchange, also had a role to play. Apparently, its systems were inundated with so called high-frequency traders, that its system could not accommodate the small investors’ orders and such. It was virtually overrun by robots. Its software designs effectively accommodated high frequency traders who trade on ultra-expensive automated software with “premium feeds” to Nasdaq’s latest quotes. The small broker, who represents the small investor, saw delay in its orders parsing through. At time of writing this article, Morgan Stanley has been subpoenaed over the IPO and the SEC will ‘review’ the Facebook IPO.

While the details differ, all this eerily similar to the Indian IPO scene in one respect: Short-changing the retail investors. From hyped-up Reliance Power to dozens of public sector companies that are underwatrer, IPOs repeatedly made suckers of India small investors.

We have been writing never to invest in an IPO unless the rules change. The current rules are loaded against individual investors. IPOs are done at a price and time chosen by the promoter/investment banker. The Securities and Exchange Board of India (SEBI) and the exchanges have an hand-off policy about the IPO quality since we have adopted a disclosure-based regime under which if you disclose the worst of negatives, it fine. This does not help investors at all. In this case, it was Morgan Stanley and Facebook who called the shots and kept the retail investors in the dark. Earlier, we had a series on IPO crackdown by SEBI. But simply fining and debarring the culprits is not enough. SEBI needs to change the rules and make it investor friendly, especially for the small investor. 

Frankly, all this will keep repeating in both India and the US, unless policymakers step in but they don’t even seem to understand the process. It is this lack of understanding of the market process that has led to the Indian government formulating foolish schemes like Rajiv Gandhi Equity Savings Scheme, which we had earlier pointed out that it will leave small investors cold and alienated Budget measures will leave small investors cold. Nobody in the opposition has understood its implication either.

Policymakers are living in the world of their own. A good example is the recent announcement by the current expenditure secretary who was the former disinvestment secretary. He grandly announced that government companies have now been told to raise money from the public. The idea, like Facebook, is the same: if you can’t raise capital elsewhere, make an ass of the retail investors. After decades of such abuse, retail investor population is shrinking in India. Even in the US, investors’ involvement in equity market is the lowest in decades. Sadly, regulators in both the countries don’t get it.

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sanjay doshi

sanjay doshi 4 years ago

While we find that the tricks played to sell the shares, the world over, are the same, we fail to see the innovation that the US companies do. FB has revolutionized social communication.Twitter has created the Arab Spring Revolution. Let us not deprecate things just because the stock price falls. There is something like emotion / sentiment/ perception and all people cannot be right all the time. Does India have this level of innovation ! It is a resounding NO.

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ramkumar 4 years ago

What happen to facebook is happening in india since last 5 year. 5 year back they (lead manager and merchant banker create hype in IPO market give lot of money of retail investor to these promotor including goverment ( NTPC SJVN, NHPC SCI and many more.). Recent in india is MCX IPO.

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Ravindra 4 years ago

Most of the IPO exercises have become "Cheating Exercises" in the name of free market and it is "heartening" to see that US is no better.
There needs to be an authority like the erstwhile Controller of Capital Issues to whom the IPO (maybe by a different name at that time) working had to be submitted and the justification of the pricing was to be obtained.

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malq 4 years ago

Very well articulated, thanks - and especially wrt the small investor in India who is not just wary about the equity market but also the convoluted process involved in entering, transmitting and exiting the equity market (in India).

The current Chairman of SEBI is on record with his views on small investors and the ridiculous RGESS is only symbolic of the disconnect that the regulators have with the real world in India.


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dayananda kamath k

dayananda kamath k 4 years ago

in india even regulator sebi and stockexchanges also help in looting investors. best case is nissancopper. those who purchased the shares in first 2 days who purchased @rs. 120 to 128 were not given the delivery of shares for 15 days reported to be at the instance of sebi. and by then it came down to rs.18/- by this they benfitted the short sellers. and who are buyers were made to bear the risk. even after complaint sebi did not respond. in any other country sebi head would have been arrested for such a fraud.when there is auction mechanism for shortsellers that could have been used and shares would have been put under trade to trade to solve the problem instead they allowed the brokers to play by crediting the shares after 15 days.

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