IPO governance

Many Indian companies raise money through IPOs for funding their acquisition plans.  The red herring prospectus (pre-IPO) specifies the intended usage of the proceeds.  It is not uncommon to hear that 50-70% of the money is to be used for “overseas acquisitions” – nebulous fluff which means little.   Analysts and investors seem to lap this up.  What seems to happen:

* The money was used on land and building

* A small unheard of company is acquired in some vague geography – ostensibly to open the market over there and provide the acquirer a foothold.

* Maybe the money was used to acquire a group company – at a crazy valuation – giving the promoter a happy exit

* Money is kept in the bank, and used for working capital requirements (also enabling false revenue accounting and valuations)

* Debt is retired

* The promoter and top management gets fancy new cars, “company guest houses” and a salary increase

You get the gist…

One report says that only one-third of IPO proceeds go towards capex .

For 47 companies surveyed, a little over 40 per cent (Rs 17,200 crore of the Rs 41,780 crore raised) of the total amount raised was parked in liquid assets (such as mutual funds and deposits with banks). Another 18 per cent or so was used for repayment of debt of subsidiaries, investment in these and for general corporate purposes.

The government wants SEBI to be involved.  Yes, but it’s also fairly difficult.  We need a far more activist analyst community (as happened after the Satyam-Maytas deal announcement) and a much more responsible I-banker community (maybe a “credibility rating” assigned by a credit rating agency to the banker concerned).  Perhaps we could also come up with a buy-back formula to force companies to return money to the public.