What ails the Indian IPO Market?–II
Debashis Basu  and  Megha Vora 21 June 2011

There is nobody in the system—promoters, lead managers, raters and regulator—who can be held accountable for the profit-pump and share-dump operation that seems common in IPOs

We had mentioned in our article "What ails the Indian IPO market-I that "that volumes of information in a public issue prospectus does not help retail investors with one crucial data—that is, expected profits, that determines the most crucial aspect of a public issue—valuation." Lack of knowledge about this data ensures that promoters and lead managers can price an issue exorbitantly and get away. That is why after listing, share prices of many stocks have simply crashed. Let's look at some examples.

In the calendar year 2010, 65 IPOs were launched. The 10 worst-performing IPOs turned out to be Emmbi Polyarns, Commercial Engineers & Body Builders Co, Tarapur Transformers, Midfield Industries, Cantabil Retail India, Aster Silicates, Tirupati Inks, Gyscoal Alloys, Sea TV Network ands DB Realty.

The worst among them were Aster Silicates, Tirupati Inks, Gyscoal Alloys, Sea TV Network and DB Realty, which fell 80%-84% from their issue prices. Could investors have avoided these issues? They certainly could have if they knew what the performance would be. Or they would have bought these stocks at a much lower price. Did the subsequent financial performance of the stocks show that these were horribly overpriced at the time of the issue? Well, DB Realty reported a net profit of Rs255.70 crore in 2011 which means that its EPS (Earnings Per Share) turned out to be Rs10.51. The issue was priced at Rs468 which means that it was offered to investors at a forward P/E of 44.52! Even if its key promoter Shahid Balwa was not cooling his heels at Tihar jail, the stock was not a great buy given its fundamentals. The lead manager for the DB Realty IPO was Enam Securities Private Limited. CRISIL had allotted 'IPO Grade 2' for the offering, indicating that the company had 'Below Average Fundamentals.'

Similarly, Sea TV Network reported a net profit of just Rs1.66 crore in FY2011 which means that its EPS turned out to be Rs1.38. The issue was priced at Rs100 —it was offered to investors at a forward P/E of 72.41! Gyscoal Alloys reported a net profit of Rs4.26 crore in 2011, which means that its EPS turned out to be Rs2.69. The issue was priced at Rs100; it was offered to investors at a forward P/E of 26.38. The current P/E is one-fifth of that.

Similarly, Aster Silicates and Tirupati Inks were offered to investors at a forward P/E of 59.65 and 30.30 respectively. Tarapur Transformers has slumped by 72% as compared to the issue price, which is not surprising since the company reported a loss of Rs4.83 crore for the year ended March 2011. But how was the pricing of a company done at the time of the issue?

None of this was known or knowable at the time of the issue—although as the ratings indicate, these companies had poor fundamentals. But the promoters and even the lead managers would have known that the pre-IPO profits were misleading—and based on the post-IPO profits, the shares would crash—given how expensively they were priced. These stocks should have been priced much lower, given the risks. That would have been possible if somebody in the system was obliged to commit a range of likely profits over the coming year. Today, thanks to the flawed rules we have imported from Wall Street, the company, the lead managers, the rating agency and the regulator remain unaccountable for what they say and what they do.

While equity is a risk investment, investors need not be open to incompetence or even legalese as a fig leaf or plainly fraudulent behaviour that is possible under the current hands-off system. Under the present system, IPO pricing and sales are often subjected to manipulation done by the promoters and executed by the lead managers, as Moneylife has pointed out several times in the past.

1 decade ago
Except for Cantabil, First Choice IPO had advised the investors to stay away from all the IPOs indicated in the article.
1 decade ago
The DB Realty IPO was managed by Kotak Mahindra and Enam. Both these BRLMs are known for aggressive pricing.They are the worst performing lead managers in Asia.

In the last one year, from 1St June to till date Kotak has managed 11 IPOS and one FPO. Out of the above, only two issues are trading above the issue price. Even the only ‘par’ issue that hit the market during the period is also trading below the offer price.
K B Patil
1 decade ago
The small investor can only hope that ultimately the market price will reflect the reputation of the promoter. Look at the ADAG group companies prices. Just recall how arrogantly the younger Ambani dismissed investor queries about the group during the Reliance demerger saga. Now, the older and far more cleaner Tata group companies market cap has overtaken the market cap of both the Ambanis. It looks like both large and small investors are losing faith in the brothers. Who is to blame for this? It is they, by their utter lack of transparency.
thiagarajan s
1 decade ago
but this needs to be published at the time of IPO itself in leading newspapers to warn the investors
Replied to thiagarajan s comment 1 decade ago
We did warn he investors before the IPO itself - First Choice IPO .
Vinay Joshi
1 decade ago
Mr. Debasish & Ms. Megha,

Further to my earlier comment posted on IPO’s I’m answering DB Realty aspects separately. [or should I say DB’s REALITY?!]

21st, DB Realty has issued clarification [in print media] that there is no linkage of DB Realty Ltd; with 2G spectrum issue!?

No attachment of DB’s properties or assets!?

However the clarification of DB states that some promoters in their individual capacity have invested in the 2G scam co’s!

How many promoters are there? A single promoter!

What filing with BSE states?

If it’s financials, fundamentals are strong why the share price is at Rs 70/-?
It claims debt leveraging ratio of mere 0.08 – but at consolidated level against ind average of 2. Any idea what is meant by consolidated average? ICAI should be roped in so as to make it’s member[s] answerable unlike Satyam.

The clarification issued fails to state who is Mr.Balwa?! now resident of Tihar,
Dismissed by Sharad Pawar as unknown youth in spite of having traveled with him in his plane!?

What should be the fate of IPO’s?


Vinay Joshi
1 decade ago
Dear Mr. Debashish & Ms. Megha,


Are issuing co’s to be blamed?!

In FY 07 & 08, 123 IPO’s. 29 either split the stock, issued bonus or rights issue.
Of the scrip’s 74, below IPO, worst performers losing as much as 95%.

For argument let’s keep aside market trend, focus on the scrip’s performance & it’s merchant banker that ran the issue!

[M/I bankers to get disinvestment issues are now having norms, now!]

Can the investors not analyse the record of M/I Banker apart from financials?
The track record.

No M/I Banker is rated – further SEBI now requires credit rating agencies to follow common rating system.

Responsibility can’t be pinned on M/I banker – but then what is miselling as defined under IRDA or mutual fund?Not applicable to M/I bankers!

Only IL&FS has returned 8.77%. Even SBI Cap! [-] 4.01% [on 4 out of 7 issues],
Almondz Global Securities [-] 48.22% ----- 100% score 4/4!?
[erstwhile Allianz Securities.]

Axis Bank bought Enam Securities – [-] 18.13% ----- ¾!

Merchant Bankers have no accountability, legally not answerable about issue pricing!

Investors are cautioned to exercise decision based on past performance of M/I/L bankers as a viable tool!?


[N.B – certain extract from Mint.]
1 decade ago
many of the ipos talked abt in the article are simply money laundering schemes. politically backed co , illgotten wealth , share allotments at ridiculously low prices and then booking capital gains on the exchange floor, thats the motive of these ipos. in this process some insuspecting guys may get trapped but inspite of the fate of these ipos so well documented such ipos comtinue to come as its of the promoter for the promoter by the promoter. indian ipo market has become a big adjustment bajaar
Vaibhav Dhoka
1 decade ago
Pre SEBI era CCI was the regulator for capital issue and its procedure was correct and worth following in our country as financial literacy is too low and grid for overnight rich is too high and this flaw is cashed by market players both in primary and secondary market.This is to say that establishment of SEBI opened SCAM era and is becoming boon for brokers companies and other market intermediaries and detrimental to ordinary investors.
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