Friday, October 22, 2010

IPO's and errors in documents

The above article is from "Mint" newspaper about the recent IPO of Coal India.
Moneylife also has an article on this. (

There are big arguments about errors being made in the Red Herring Prosepectus / Offer Documents that are being prepared. The surprising thing is that someone actually spotted the error ( kudos to the Regulator for having spotted these).
The argument is about whether the error is serious enough to warrant SEBI offering an exit option to the investors.

I think, SEBI is right. In fact, there were two earlier IPO's where such things happened. SEBI is being consistent.
To me, the following are the points to look at:

i) The Investment bankers (merchant bankers who advice the issuer and take care of all documentation) are getting away scot free. They are the ones who are directly responsible for errors;
ii)One practical point in favour of SEBI keeping quiet, is that no one actually reads the DRHP or the offer document.IPO's are sold on hype, grey market premium and the aggression (both official and otherwise) of the lead manager. Institutional investors usually do not bother much about going through the details.So, if there is an error in the DRHP, it hardly matters. The fund manager who invests, just looks at the 'flip' gains that he can make;
ii) SEBI never punishes the investment banker. This is exacerbated by the recent import of 'compounding' from the US of A. This implies that there is a tariff card for wrong doing. The investment banker has merely to estimate the likely compounding tariff vis a vis the potential gain. Compounding expenses today have become a part of the Business Plan of intermediaries. They can screw up, mislead investors and /or hide the truth, without worry. No one is going to threaten their existence;
iii) Investment bankers are hiring poor quality people. This is because they want to show off. They tend to hire from the "B" schools, whose products have no patience for the details. All of them are potential CEO material and are excellent at hustling or putting together a concept paper. In the olden days, the document verification, data input in offer documents etc used to be seen with a critical eye, by old timers who could smell mistakes;
iv) The so called 'exit' option supposed to be offered by the issuer of the IPO is hardly seen. Why cannot SEBI insist that this exit option be announced prominently, in each and every publication/media where the IPO offer was splashed? Also, it should be a distinct ad and not hidden somewhere in a jungle of print.

Fairness is required in this industry. Alas, no one wants it and no one is bothered by it. Even the issuers are not concerned, I think.

No comments: