Regulators awaken if you care for IPO-market!

The new Government at the Centre wants to revive the primary market and attract more retail investors into the system. Capital market regulator, SEBI, too sounds very optimistic about the Government’s intention. However, the fact is, retail investors, who flocked the market in the nineties, lost faith in the market when the regulators failed to checkmate the unscrupulous fly-by-night operators from duping the gullible investors. In just three years (1994 to 1996) as many as 3752 companies tapped public funds through IPOs of which more than 2000 vanished subsequently.

Two decades have passed since the unprecedented primary market boom, have our regulators taken any concrete step to revive the primary market? Have they encouraged quality IPOs to boost investor confidence?  If the credentials of the BSE-SME IPOs are anything to go by, our regulators are either thoroughly incompetent in screening the promoters and their antecedents, or they are hand-in-glove with investment bankers in obliging the conning promoters.

Market regulator SEBI does not vet the SME offer documents and has left the job to the respective stock exchanges. In turn, stock exchanges solely depend on the due diligence done by the investment banker (lead manager). Now, what is the credibility of the due diligence certified by the so called SME-specialist Investment bankers?

Take the case of BSE-SME IPO, Carewell Industries Ltd, that hit the market in the last week of July 2014. This Chennai-based company’s registered office, phone number and fax number were the same that of another ‘BSE-SME’ from the same city, Onesource Techmedia. Interestingly, both these Chennai companies had the same auditor from Kolkata!  ‘Public Shareholder’ of one company was presented as a promoter of another company! Whereas Carewell was lead-managed by Inventure Merchant Banker, Onesource was handled by Guiness Corporate. Both these IPOs had the same market maker viz. Guiness Securities. If Carewell and Onesource were interlinked, why the link was not disclosed in both the offer documents?  Who is responsible for the concealment of facts? Also if the merchant bankers cannot get the basic facts verified, what sort of due diligence are they conducting?

The qualitative difference between the SMEs of BSE and NSE speaks volume. The core promoters’ stake in SMEs listed on BSE is abysmally low as compared to NSE-SMEs. Many a BSE-SME has a body corporate as main promoter whose credentials are far from convincing. Most of the BSE-SMEs have collected money through private placements from the public-shareholders which are officially banned by SEBI. Since BSE allegedly invites every Tom, Dick and Harry to list their shares on its SME platform, it has not been able to enforce the basic listing norms with regard to disclosures. For instance, the latest financial information of many of the BSE-SMEs is not available on the BSE website.    

Interestingly, the companies who have no latest information or having only abysmal earnings command exorbitant premium on BSE-SME than the more credible ones. Of the 66 SMEs listed on BSE, more than 30 discount their earnings in excess of 100 times. In other words, an aggregate SME profit of Rs 47 cr has resulted in a market cap of more than Rs 7500 cr at an average P/E multiple of 162! About ten SMEs are commanding a P/E of more than 1000!! As compared to this, the five NSE listed SMEs have a P/E multiple of only 12. It is said that as NSE’s listing norms are more stringent not many SMEs opt for NSE platform.

SME specialist-merchant banker, the Kolkata-based Guiness Corporate Advisors, who dominates the BSE-SME platform with listing of 15 IPOs, is lead-managing two more SME-IPOs this month. Whereas Naysaa Securities hit the market on 5^th February for conducting brokerage business, Encash Entertainment is tapping on 9^th September for enhancing its film business. Typical of BSE-SME, the core promoters (individuals) would hold only 6.56% of the post-issue equity and a little known company (Encash Securities) who acquired significant quantum of shares through private transfers at an exorbitant price of Rs 500 is going to hold more than 25% of the company’s equity. Like most of Guiness-managed issues, Encash Entertainment too has raised money from public (more than 240 people) via private placements.

The promoters of Encash have more than a dozen companies in their fold most of them are into losses. Guiness-associated Onesource Techmedia, also engaged in film related business, is currently languishing at 50% discount on the trading floor. Given the track financial track record of BSE-listed SMEs, one can easily predict the fate of these SMEs in the years to come. By allowing such companies on SME platform, whose interest are our regulators serving? SEBI surely owes an explanation to the investing public.