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

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.



sanjay doshi

5 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.


5 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.


5 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.


5 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.


dayananda kamath k

5 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.

Glancy Xavior

5 years ago

Sytem designed to squeeze the Investors. In primary market , Merchant bankers make sure the Issuer gets the exorbitant price. When it lists and trades for period ,Govt make sure they get STT &Service Tax. Exchanges make sure they get Transaction charges. Brokers make sure they get commission. SEBI make sure that ultimately INVESTOR get another DELISTED or Penny stock in their holding. ...............Hail (un)holy system

Deepak R Khemani

5 years ago

How does Facebook add to the GDP of the United States?

.....well if you call GDP "Grand Dumb People" I suppose Facebook does add to it.

B Rajaram

5 years ago

Absolutely right you are. From the start I was questioning where is the revenue stream for Face Book? The so called advertisement revenue should have been reflecting the number of ads that would be disturbing you on the Face Book. But I never felt so. SO quiet. How was I getting the free lunch? When IPO was floated, I felt how it got rated so high. All imagined future revenues. Hmm truly American institutions are not up to the mark then.

Public Interest Exclusive
The saga of Delhi BRT – Part I

A Public Interest Litigation has been filed by an NGO representing interests of para-public transport of autorickshaws. It claims that being a para-public transport, autorickshaws must be allowed to use the ‘underutilized’ BRT lanes. In this two-part article, the saga of the Delhi BRT will be unfolded

If you take a car lane, you will not be able to carry more than 1,250 cars per hour safely. Given the fact that on an average it carries less than two persons, the number of people a car lane carries does not exceed 2,500 persons per hour.

A bus on the other hand, with a 50 seats, peak time load of say 70 persons, plying every minute, carries 70 x 60 = 4,200 persons. If the frequency is increased to 30 seconds, it will carry 8,400 persons per hour. If the bus to be used is an articulated one with capacity of 1,75 passengers, the bus lane will carry 120 x 175 = 21,000 pph.

If there are three lanes on a road and there is mixed traffic on it, we know from experience that number of persons the three-lane road carries, with stoppages at signals, etc, come to about 3,000 plus about 1,500 from 20 buses that may pass in an hour. Thus it is reasonable to say that 5,000 persons are carried by a three-lane road with mixed traffic.

Let us reallocate the lane spaces such that one lane is provided to buses and two for cars and the rest. The throughput in the two lanes for mixed traffic can come down to 3,500 and the bus lane will then carry 1,500 if only 20 buses pass. This means the headway between buses will be three minutes.

With a dedicated bus lane, we can ply a bus every 30 seconds also and it can then carry 60x60/30 x 70 = 8,400 people per hour. At cruising speed of 30 km/h and a small headway of 30 seconds, the distance between two consecutive buses would be as much as 250 m which would make other road users wanting to use the space.
With the dedicated bus lane or the BRT lane, the throughput of the three lane road would be as high as 3500 + 8400 = 11,900 persons per hour. If articulated buses with capacity of 175 or bi-articulated buses with capacity of 250 per bus are deployed at 30 seconds headway, the throughput would be 120 x 175 = 21,000 and 120 x 250 = 30,000. Thus, using BRTS (bus rapid transport system), overall mobility on the road is increased more than two-fold, five-fold and seven-fold of mixed traffic for normal, articulated and bi-articulated buses respectively. As stated earlier, at 30 km/h speed and 30 seconds headway, the gap between two buses would be 250 m and at 20 km/h speed it will be 166 m. It is sufficient for the users of non-BRT lanes to feel that the space is being denied to them and their mobility is being hampered.

Let us look at Bogota where the locally elected body through the then visionary mayor Enrique Penalosa opted for BRTS, a model that has been in successful operation in Curituba since the 1970s. Bogota, a city with too many motorized personal cars causing traffic woes and air and noise pollution, did not opt for Metrorail although its per capita income was far more than any of Indian cities. They opted for BRTS because it was affordable and quickly implementable. Not that Penalosa did not face opposition but he had people’s mandate and the will to implement policies which were people friendly. In Bogota, the main BRT corridor runs articulated buses sometimes on dual lanes and most times on single lanes with overtaking lanes at certain locations. The headway is as little as 12 seconds and speeds are touching 40 km/hr.

Having said these things, let us look at what difficulties BRT in Delhi is facing.

Going back to 2008 when the BRT corridor was under implementation. Barring a few, media in general and the Times of India in particular was carrying out a vicious campaign against the Bus Rapid Transit (BRT) Corridor in Delhi, prior to and in the initial stages of implementation, giving a one-sided view. Independent studies were carried out at such media attack; one of them was by NDTV too. It came about that the about 5.6 km partial implementation of BRT of planned 19 5 km was being welcomed by public transport users while motorists were naturally adversely affected and their criticism was as expected. BRTS, as has been explained earlier, is to improve overall mobility of people and not of users of personal motorized transport. When a group of individuals and NGOs collectively wrote a letter to the editor of ToI, Delhi and others protesting against such irrational and false criticism and reporting, and NDTV telecasting its findings, the campaign died down. The government of Delhi decided to play cool and did not pursue with completing the full corridor to avoid wrath of the motorcar lobby, which surely cannot be only the car users. The economic stakes of the manufacturers are high and so is their advertisement budget on which media flourishes. To them, what is good for the masses is of no consequence.

In the light of the Commonwealth Games 2011, lanes were reserved for Games movements and very heavy penalty imposed for violators. Since criticism of this effort would be considered as anti-patriotic, the media and the car lobby kept quiet, knowing very well that this will not be allowed to become permanent.

However, the Delhi government has a clear vision. The Metro Rail, though being used by many, does not address commuting problems of the common man in Delhi and have realized that short of providing BRTS network, it has no financial wherewithal to provide a larger metro rail network. The Delhi government has now decided to plan and implement 14 BRT corridors.

If the BRT network comes into effect, the stakeholders are not only the car lobby itself but the Metro Rail itself. Metro rail is barely able to get enough revenue for its operations. It is looking for revenue from monetization of land use. Both these will get adversely affected by successful implementation of BRTS. The Delhi government has a stake in Metro Rail and it is a partner in ministry of urban development’s Delhi Metro Rail Corporation (DMRC).

However, as an elected body it cannot bypass large electorate’s urgent needs and therefore the 14 BRT corridors are going to be implemented sooner or later. In fact the third term of Sheila Dixit as CM of Delhi was won by projecting BRT success.
With this as an introduction, the second part of the politics of the BRTS saga will be unfolded next week.

(Sudhir Badami is a civil engineer and transportation analyst. He is on Government of Maharashtra’s Steering Committee on BRTS for Mumbai and Mumbai Metropolitan Region Development Authority’s Technical Advisory Committee on BRTS for Mumbai. He is also member of Research & MIS Committee of Unified Mumbai Metropolitan Transport Authority. He is member of the Committee Constituted by the Bombay High Court for making the Railways, especially the Suburban Railways System Friendly towards Persons with Disability (2011- ). He can be contacted at [email protected])



Sudhir Badami AUTHOR

5 years ago

As can be seen, the gap between two buses in the BRT lane could vary between say 150 m to 250 m depending upon the speeds of the buses for a headway of 30 seconds, this space is being eyed by other motororised modes. Considering that Autorickshaws and Taxis are para-public transport, it is being considered by some that in an PIL, the case will be looked at with greater sympathy than if asked for personal motorised vehicles. In my opinion it was a ploy for which apparently the Hon'ble Court has fallen to by expanding the scope to experiment with mixed traffic. By simple application of mind and objectivity of improved mobility, perhaps the court could have directed CRRI to state how effient BRTS is working and how it could be improved in performance rather than taking a retrograde step of experimenting with 'mixed' traffic. As you will see in the second part, CRRI has gone beyond that and violated the Terms of Reference of the experiment.

As regards enforcement is concerned, perhaps taking photographs of violators and putting it up on website continually and keep followup measures like repeat violator's penalties hikes, including jail term is the only answer. How is it that during Commonwealth Games there were practically no violators of the CWG dedicated lanes?


5 years ago

the article summary talks about 'autorickshaws', but the entire content is devoid of anything about them. this does not make sense...


5 years ago

BRT lanes are being used for exclusive lanes by govt officers and there is no check. Can you imagine a traffic cop stopping an MLA/MP/IAS officer. Implementation will be the key and bureaucrats will fail miserably as they will not be able to give up the opportunity of having access to empty roads.

Adarsh Scam: Panel calls Shinde, Deshmukh

Union ministers Vilasrao Deshmukh and Sushil Kumar Shinde, both former chief ministers of Maharashtra, have been summoned by the two member commission set up to inquire into alleged irregularities in Adarsh housing scam

Mumbai: The two-member commission set up to inquire into alleged irregularities in Adarsh housing society on Wednesday summoned Union ministers Vilasrao Deshmukh and Sushil Kumar Shinde, both former chief ministers of Maharashtra, next month, to record their statements, reports PTI.

Deshmukh has been summoned on 21st and 22nd June while Shinde has been asked to appear on 25th and 26th June. The summons was issued by the commission headed by JA Patil, retired judge of the Bombay High Court.

Meanwhile, the commission reserved till tomorrow its order on an application filed by another former chief minister Ashok Chavan seeking exemption from appearance to give evidence.

Chavan was to appear before the commission today. He, however, filed an application yesterday seeking exemption.

The commission's counsel Dipan Merchant argued that there should not be any discrimination between witnesses, no matter who they were and howsoever highly placed they might be. The witnesses have to come before the Commission and give information, he said.

Both Deshmukh and Shinde had claimed in affidavits before the Commission last June that the Adarsh land in Mumbai belonged to the Maharashtra government and was never reserved for defence personnel at Kargil war heroes.

"The records maintained with the collector of Mumbai clearly show that the land belonged to the state government.

The ownership of the land was never an issue at any stage so far I am concerned," Deshmukh had said.

He had also denied allegations that he had continuously held meetings with Kanaihyalal Gidwani, one of the promoters of the scam-tainted cooperative society.

"I deny that it was on the insistence of Gidwani that Revenue department was asked to put up the case of allotment of land to Adarsh. The suggestion that I ordered the allotment of land to Adarsh in an irregular and/or improper manner to favour Gidwani is fully mischievous," his affidavit said.

Earlier, former principal secretary Ramanand Tiwari, in his affidavit, had said approvals for the Adarsh building had been given by Deshmukh.

Shinde too had reiterated Deshmukh's version that the Adarsh land belonged to Maharashtra government and added that the allotment of plot to the society was done after proper scrutiny of all records.

"The Letter of Intent dated 18 January 2003 made it clear that the land was allotted according to the government resolution (GR) of July 1999 which did not provide reservation for war heroes," Shinde had told the Commission.

He had also denied allegation of receiving favours from the society members and said that due process of law was followed and verification done by several state government officials before granting permission to the high-rise.

"During my tenure as chief minister from May 2003 till November 2004, I did not get any complaint about any alleged irregularity in allotment of the land to Adarsh Society," he had asserted.

Chavan, who had to step down as the chief minister in November 2010 following the scam, while seeking exemption from appearing in person said he had already filed an affidavit in which he disclosed whatever information he had about Adarsh Society. He said he had nothing more to add and did not wish to say anything before the Commission.

In its interim report, the commission had said the land belonged to the state government, contrary to the claim made by the Ministry of Defence that it was a defence land.

Chavan is accused of recommending 40% allotment of flats in the Adarsh Housing Society, originally meant for Kargil war widows, to civilians. Chavan is also facing allegations that his relatives got flats in the society.

He was the revenue minister from 1999-2003 when the land was allotted to the housing society. Deshmukh was the chief minister during that period.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)