NBFCs out to exploit IPO financing

The Kotak announcement about financing Geometric issue has raised many eyebrows. While the total public issue size (including offer for sale of Rs 30 crore) is Rs 39.3 crore, Kotak Mahindra has allocated Rs 300 crore, which itself is 7.63 times the IPO size. “This is a dangerous trend. This is like creatingan artificial demand for an IPO. Such big scale financing will ensure that the stock, when listed on the stock exchange, is quoted at a huge premium. Such practices will only add new vigour to the mad scramble for infotech stocks. This may not be a violation of any law but it is not a good practice,” said an investor.

“These companies know that most of the investors who take loans for IPO subscription will not be allotted shares. But their intention is to make money out of the crazy demand for infotech shares,” said an analyst. Earlier, while institutional investors accounted for a bulk of IPO financing, nearly 50 per cent of the money now goes to retail investors.

It’s not only finance companies even badla financiers – people who finance carry-forward charges on the BSE – are finding it relatively more lucrative to invest their funds in software IPOs, which gives instant returns, rather than lending in the badla market for a mere pittance of around 30 per cent. There was a general shortage of fundstoday, which bears out the theory of badla financiers turning their attention towards the IPO market.

With badla financiers going to the IPO market, badla rates had shot up to 33 per cent from 21.5 per cent on the Bombay Stock Exchange. Some of them attributed it to funds being earmarked for the initial public offering of Geometric Software which opened for subscription on Friday. While the issue size itself is small at Rs 39 crore market sources said that what matters is the oversubscription which will determine the price at which the scrip is listed.

BOOK-BUILDING COMPLAINTS: Even as infotech companies and IPO financiers are laughing all the way to their banks, investor complaints are mounting against the so-called book-building route adopted by some companies. A major fallout of the book building process is the relegation of smaller investors to a lesser role in IPOs. In the case of Hughes Software issue, 90% of the IPO was through the book building method while the balance 10 per cent was byway of a fixed price offer to individuals.

In the book building component, only 15% was reserved for small investors applying for less than 1,000 shares. In other words, in the book building route, only about one-fifth of the IPO was available to small individual investors as opposed to the 50 per cent in a normal public issue. Though the fixed price component was reserved for individual applicants, no maximum limit for the application size was prescribed. Thus, the situation was tailor-made for market operators to edge out the small applicants through sheer financial muscle.

Moreover, there were many other loopholes as well. According to the bidding process for Hughes Software book built portion, the syndicate member, who functioned as the investors’ agent, had the right to take the requisite bidding details from bidders based abroad even without the bid forms being physically received. This kind of discretion available to market intermediaries could possibly have led to rampant manipulations.

Yetanother discretion vested in the book running lead manager is to "look at the seriousness and long-term commitment of the investor" while finalising the allotment for the book built portion. Taking advantage of this clause, merchant bankers of some of the recent book-building issues had refused or pruned allotment to a section of the investors citing lack of seriousness or long-term commitment, but allotted shares to their clients and friends.

Pharma cos also line up for IPOs

MUMBAI: It’s not only infotech companies, the past few months have seen four pharmaceutical companies (including the proposed Rs 500-600 crore mega issue from Cadila Healthcare) unveil plans to tap the capital market. At least two more pharma companies – including the Mumbai-based US Vitamins and a small Pune-based firm – may follow the Gujarat-based Paras Pharma with their IPOs. All the proposed offers, analysts said, will come at significant premiums though the Cadila issue (planned via the book-building route) is expectedto be a `landmark one’ in more ways than one.