Investors beware, promoters rushing in with IPOs

The major factor which has prompted promoters to rush in with IPOs is the return of buoyancy in the stock markets. The benchmark Sensex which crashed from the mid-February high of 6,150 to below 4,000 has now bounced back to 4477, thanks largely to the recovery in ICE stocks. “These IPOs are from the ICE sector. You won’t find any IPOs from the old economy,” said a merchant banker.

Several companies — especially from Hyderabad — which made IPOs in the recent past have disappointed investors. Companies like Helios & Matheson, Avantel Softech, Visu Cybertech, Frontline Software and Quantum Softech were quoting below their offer prices. At least 15 infotech companies, floated by promoters in Hyderabad, had come out with inferior quality IPOs. A company — Suchinfotech — which has not even started operations on a commercial basis is also planning an IPO.

“ICE companies are giving a rosy picture. They project a high turnover and profit growth…. periodically announce takeover plans, overseas issues, listing on Nasdaq and so on. They are vying with each other to get investors attention,” said Bombay Stock Exchange dealer Pawan Dharnidharka. Zap Inftech which announced plans for a “Nasdaq listing” recently merged with another company.

Creative Eye which deferred its IPO plan one month ago following poor response from investors has now revived its plans. It has now made changes in its offer terms, including change in face value to Rs five instead of Rs ten, in a bid to rake in investor moolah. Other media companies like Tabassum International, Tips Industries and Pritish Nandy Communications are expected to hit the market with IPOs in the near future. There are a record 71 risk factors spreading over ten pages in the offer document of Hughes Tele.com, which is planning a Rs 750 crore issue.

Not to miss an opportunity, many companies are looking at a good premium. While creative Eye was earlier exploring a premium of Rs 225, Pritish Nandy is expecting a premium of Rs 155 for its book-building exercise of the IPO. The first risk factor in these IPOs, including that of Pritish Nandy Communications, is non-appraisal of project costs by any bank or financial institution. If project costs are not appraised by banks and financial institutions, fund utilisation will be at the sole discretion of the managements. This means there are no serious checks on usage of funds.

A good number of small IPOs — below Rs 10 crore — are by infotech companies floated by promoters with hardly any experience in the last one year. The promoters of IMAP Technologies which has planned an IPO have no major experience in the field. According to merchant bankers, every week at least one or two such infotech companies are floating IPOs. “Such companies have no business models and they operate at the lower end of the infotech spectrum. It is to be seen whether these small companies will survive four or five years down the line,” said a London-based management expert who is advising several Indian companies.

There is also an apprehension in several quarters that some of the software and media companies which are planning IPOs (or already raised) may not need such huge funds. It’s time for investors to take a close look at the issue documents and track record of promoters before putting money in IPOs.