Tags:
Journalism of Courage
Global bank Standard Chartered (StanC) has come out with the first ever Indian Depository Receipts (IDR) issue. According to the company,it is issuing the IDR to enhance its market visibility and brand profile in India. The London-based bank has raised Rs 2,490 crore from the issue that opened on May 25 and closed on May 28. In terms of specific deployment,the proceeds will be repatriated to the UK and would become a part of the banks general resources as a group. It is not being raised for deployment in India specifically.
The group chief executive says,We are not doing it for capital purposes because we are very strongly capitalised. We are doing this because we think its a great way of visibly reinforcing our commitment to Indians and enhancing our brand and presence here. Put in other words,it reads,we are not raising capital for the money but to build the brand. Even if the platitudes were taken at face value,the IDR issuance process hasnt been a fabulous success story for StanC.
It doesnt take a marketing guru to realise that there are better ways of building a brand among the public than through raising capital. After all,only a minuscule portion of the potential customers,who are the primary audience for the brand,are investors. If StanC has really done the IDR for its brands sake and not for money,the endeavour hasnt quite paid off. Of the 72 million shares offered to retail individual investors,only 18.21 million shares were subscribed to. The subscription rate of 25% was despite the fact that the issue price for retail investors,like in most cases,was at a discount of 5% over institutional investors.
The icing on the cake was that of the 4.8 million shares offered by StanC to its employees,less than a million were subscribed. If the effort was intended to build StanCs brand among its own employees,that too hasnt been truly effective. I suppose most employees would have earnestly considered investing in the IDR. Since they let it pass,it seems they probably werent gung ho about their companys prospects and the IDR didnt seem a good buy at the current price.
The IDRs have been priced at Rs 104 a piece. The price band was initially set at Rs 100-115. Most successful initial offerings get priced at the upper end of the price range or at least above the mid-range. Even by those benchmarks,the IDR doesnt seem to be a blockbuster hit. The only category of investors who are apparently bullish are the Qualified Institutional Buyers (QIB). Of the 84 million shares reserved for them,the number of bids have been 348.4 million,around 4.15 times.
To comprehend the oversubscription of the QIBs and see if StanC has been able to build the brand at least among the QIBs,lets understand the issue process. The StanC IDR was done through an issue type called book buildingthe common practice in most developed markets. It is a process of price discovery in which the book is built by one or more major investment banks called the bookrunners. The book running lead managers for this issue were Goldman Sachs and UBS. The book is an off-market collation of investor demand by the bookrunner,and the price discovery process is kept confidential between bookrunners and the issuer. The bookrunners,in consultation with the issuer,determine the price of the issue after the book is closed. Normally,the bookrunners have a good rapport with large institutional buyers,which I am sure,Goldman Sachs and UBS have. In the new issuance process,there is a bit of I scratch your back; you scratch mine that happens between the bookrunners and institutional buyers. The QIBs benefit from good issuances while the investment banks need the QIBs to support the not-so-well-received issuances. If Goldman Sachs and UBS had not been able to get the StanC IDR fully subscribed,it would have been a massive loss of face for both of them. Given the lukewarm response from the retail investors and employees,Goldman Sachs and UBS would have turned on their charm with QIBs during the book building process. The price behaviour of the IDR in the coming weeks will tell the tale.
Being more transparent in their communication would have probably helped StanC generate a better response for the IDR,than mouthing clichés like visibly reinforcing commitment to Indians and enhancing brand. Most likely,StanC is raising the money now so that it doesnt have to look for prospective capital providers if it were to go through a period of stress like other global banks did during crisis period. For instance,Bear Stearns,months prior to its being eventually bought out by JPMorgan,was desperately looking for capital but couldnt manage any. The intention is even more apparent given that StanC is using it to pile on its groups capital and not necessarily for growing the business. After all,nobody raises costly capital if it doesnt really need the money. There are worthier ways of building brands and showing commitment to Indians than raising equity.
The author,formerly with JPMorganChase,is CEO,Quantum Phinance
