HAVE YOU DONE YOUR HOME WORK BEFORE INVESTING IN AN IPO? Mr.S.Saravanan* Research Scholar Sathyabama University Dr.R.

Satish** Associate Professor SRR Engineering college

____________________________________________________________________________ INTRODUCTION In recent years, guidelines issued by SEBI to streamline public issues together with the prospect of making a quick gain on listing of the shares in a buoyant market, public issues are becoming an avenue for investment for retail investors. Investing through the primary market might be important considering that once the shares debut for trading, they usually become dearer to invest in, if the company is reputed one.This entire path breaking initiatives together with abolition of taxation on dividend, reduction of long term capital gains tax and allotment of quota in IPO for small investors have begun to attract the Indian investors to the capital markets in droves and the number of retail investors had increased multi-fold in the post-reforms era. As per SEBI definition, a retail investor is one who finances a listed company in the form of equity (shareholder) or debt (debenture holder) upto Rupees Two lakh through an IPO. PRIVILEGES THAT A RETAIL INVESTORS HAS OVER OTHERS ASBA : ASBA refers to an application mechanism for subscribing to initial public offers (IPO), which ensures that the applicant's money remains in his bank account till the shares are allotted. Retail investors get a day extra to fill IPO bid forms: Retail investors can bid for shares a day after the bidding process closes for institutional investors. So response for an IPO can be gauged through the subscription level of the Qualified institutional buyers. Bidding at cut off price: Cut-off price means the investor is ready to pay whatever price is decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor. Discounts: The retail investors can avail this discount at the time of making the payment and filing their applications for any IPO.There are two benefits for this. First is the fact that they will

have to make a payment of less amount for those number of shares. Secondly, if those shares are not allotted, the refund money that they actually await will also be lesser in amount. RETAIL INVESTORS PERFORMANCE IN 2011 Of 39 public issues that hit the market this year 26 did not even see the portion reserved for qualified institutional buyers (QIBs) fully subscribed. In other words, 67 per cent of the issuances reflected a clear trend of lack of conviction and confidence among institutional investors. Interestingly, in a majority IPOs wherein QIBs stayed away, the offers were literally bailed out by high net worth individuals (HNIs) and retail investors. HNIs and retail investors had shown unusually high levels of risk appetite as far as IPO investing is concerned during 2011, stated the research note. This spurt in risk appetite, however, came at a time when most issues failed to generate positive returns. Of the 39 public issues, only nine are trading above their issue prices. And, 30 are trading below their issue prices, stated the note. This huge wealth erosion might be attributable to tendencies of high pricing and lower quality of the issues, it added. The year, which also saw the Indian benchmark indices featuring among the worst performers, saw a lot of small issues of less than Rs 100 crore in size. Seventeen public issues, or 64 per cent, fell in this category, a marked difference from some of the earlier years. On the other hand, there were only three issues of more than Rs 1,000 crore in size. Last year, 14 issues, with a size exceeding Rs 1,000 crore, hit the market. DO SOME BASIS ON THE COMPANY 1. Business model of the company Understanding the business model is vital to invest, without knowing what the company operates it can be considered as just a betting. 2. P/E & EPS 3. Risk to valuation Have to analyze whether the company is risk prone to exchange fluctuations, sensitive to global markets, seasonal concepts , Market risk, currency risk, company risk, profitability risk, revenue risk, government policy etc,.

Diversification of risk: Diversifiable risk is that risk which can be eliminated by investing in different types of companies. According to the risk theory, such risk becomes zero if an investor invests in 15 companies. Beyond that diversification does not help. 4. Why am I investing in this company? Am I investing for capital gains(short term) or investment to get dividends and bonus(Long term). 5. Can I digest the stock correction? 6. Peer groups comparison 7. What is the purpose of the IPO? 8. Does the company have strong corporate governance? Competent management is a sine quo non for the profitability of a company and capital market gains, therefore, imperative on the investors to examine the background of promoters /directors before making investment decisions. 9. How has the IPO been graded by rating agencies? Grading provides an idea on fundamentals of the company which can be from 1 to 5. IPO Grading is designed to provide investors an independent, reliable and consistent assessment of the fundamentals of IPO Issuer Companies. As IPO Grading is decided much earlier then the issue price or issue dates are finalize (usually on the IPO filing) and they only tells the fundamentals of the company, investors should not consider them as 'Buy IPO' or 'Skip IPO' recommendations.

CONCLUSION Give me one example where company management thinks about retail investors? Where before making a decision any company will think of small retail investors like you and me. I do not believe there is any! So either you be part of it or avoid it. I choose to be part of it and swim carefully with following factors in mind. Check for the QIBs subscription and bid on the last day Make use of ASBA facility and at least have the interest advantage not getting lost if share is not allotted. Larger issues can be a worth and watch if not for short term at least for long term. And of course doing all the basis that is possible with the limited information that is available. REFERENCES

www.indianmba.com www.tipblog.in www.business-standard.com www.stockmarketguide.in

What is the life cycle of an IPO?

Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market. 1. Issuer Company - IPO Process Initialization 1. Appoint lead manager as book runner. 2. Appoint registrar of the issue. 3. Appoint syndicate members. 2. Lead Manager's - Pre Issue Role - Part 1 1. Prepare draft offer prospectus document for IPO. 2. File draft offer prospectus with SEBI. 3. Road shows for the IPO. 3. SEBI Prospectus Review 1. SEBI review draft offer prospectus. 2. Revert it back to Lead Manager if need clarification or changes (Step 2). 3. SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus. 4. Lead Manager - Pre Issue Role - Part 2 1. Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved. 2. Decide the issue date & issue price band with the help of Issuer Company. 3. Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus. 4. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors. 5. Investor Bidding for the public issue 1. Public Issue Open for investors bidding. 2. Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form). 3. Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites.

4. Syndicate members send all the physically filled forms and cheques to the registrar of the issue. 5. Investor can revise the bidding by filling a form and submitting it to Syndicate member. 6. Syndicate members keep updating stock exchange with the latest data. 7. Public Issue Closes for investors bidding. 6. Lead Manager Price Fixing 1. Based on the bids received, lead managers evaluate the final issue price. 2. Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges. 7. Registrar - Processing IPO Applications 1. Registrar receives all application forms & cheques from Syndicate members. 2. They feed applicant data & additional bidding information on computer systems. 3. Send the cheques for clearance. 4. Find all bogus application. 5. Finalize the pattern for share allotment based on all valid bid received. 6. Prepare 'Basis of Allotment'. 7. Transfer shares in the demat account of investors. 8. Refund the remaining money though ECS or Cheques. 8. Lead manager Stock Listing 1. Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date. 2. Finally share of the issuer company gets listed in Stock Market.

Factors affecting Pricing of an IPO

Pricing of an IPO is a very significant task which will have a straight impact on the success/failure of the IPO. An IPO price must be such that it is low enough to produce interest but at the same time, it must be high enough to raise adequate funds for the firm.

According to an American investment Banker, beyond pure luck, they key elements of success in pricing of issues are: Experience in pricing, Knowledge of the company going public (and its industry), Knowledge for actual and potential buyers for the stock in both primary and secondary markets. We will try to list below some of the most important factors which must be analyzed and understood to price issues. 1. Current status of Primary and Secondary Markets: If investors are confident of capital markets, then issues with justifiable high premium would be fully subscribed whereas a market which is not favorably viewed by investors cannot even ensure success for the issue at par. 2. General health of the issuers industry. 3. Fundamental quality of the issuers business and the caliber of its management team. 4. Performance of shares of comparable companies already publicly traded: This would be relevant in case of new companies making issues; in the case of existing companies making new issues, the performance of outstanding shares should also be taken into account. 5. Issuers projected annual earnings per share: Corrected to reflect the increased no. of shares outstanding as a result of public offer and correlated with the price/earnings ratio of comparable companies in similar industries(for existing companies the historical P/E ratio adjusted for any special risk factors of the new project and any forecast changes in the nature of existing business should be taken into account) 6. The aftermarket conditions as forecasted by lead manager: Normally the price should be arrived at to retain some unfulfilled demand to ensure active trading of the shares on listing. Investment bankers operating in U.S. have a goal of pricing an IPO such that it will trade 20-60 days later at roughly 10% above its IPO price. 7. Other important factors to be taken into account are special risk factors inherent in the project, the financial leverage and operating leverage of the project.

Significance and Risk Factors in investing in IPO

When you choose to invest in IPO, you must remember that it has certain merits as well as demerits. On one hand, it involves a great degree of risk but if it successful, it might result into handsome returns for the investor. After all the golden rule of investment is: Higher the risk, higher the return! The firm comes out with an IPO in accordance with its set of objectives while you as an investor might invest having your own set of objectives. So, we can study importance from the angle of both: the company and investors.

Importance to the Company: A firm, that is need of additional capital, either can borrow cash or sell shares in order to raise funds. Else, it has the option of Going Public. Most of the times this is believed to be the best option since: 1. Costs involved with IPO are much lesser than the high costs of borrowing. 2. One does not have to worry about repayment, as the capital raised is not required to be repaid. 3. When stocks are sold to public, more often than not could lead to share price being appreciated because of certain market factors which arent directly linked to the firm. 4. It provides the firm an opportunity to tap a large pool of investors who give their money to the company for future growth. Importance for shareholders: It is common for investors to consider IPO as an easy way to churn money. The most appealing characteristic of an IPO is that generally shares are priced pretty low, and that there is possibility of the firms stock price rising on the day of shares being offered. Speculative investors, who look after making short term profit, consider this as a good opportunity. Such investors seek to get immediate returns and are less keen on long term gains. By and large, people consider that to invest in an IPO is pretty simple and free of hassles, yet it involves risk and quite many investment advisers shall suggest you to not invest in it until you have sufficient knowledge and experience. The possible risk factors could be due to: 1. Unpredictable Unpredictability of IPOs is one of the key reasons as to why investment advisers ask investors to stay away from IPOs. Shares are usually offered at lower prices, but we see significant changes during the day they will be offered. There are possibilities that they may rise sharply during that day and then fall steeply the next day. 2. Potential of the Stock Market Stock Markets, being subject to high volatility, investments in an IPO do not guarantee returns. The fluctuations in the markets affect not only households and individuals but the entire economy. Due to this volatility it is not easy to predict how the share will perform over a period of time as profit as well as the risk potential of the IPO is dependent on the condition of the markets at that particular time. 3. No Past Track Record Of the Company Shareholders dilemma increases as to whether or not to invest in that IPO as the companys track record is not available. There is no basis for making decision for investment in the absence of track record. Risk Assessment: The probability of buying shares in a capable new firm and finding the subsequent success story has captivated quite many investors. But prior to taking the big step, it is very important to understand some of the challenges, key risks and likely rewards associated with investing in an IPO. This has made RISK ASSESSMENT an imperative task in Investment Analysis. Higher the desired returns, higher shall be the degree of risk involved. Hence, a meticulous study of risk attached with the investment must be done prior to taking any consideration. To invest in an IPO, it is vital not only to have knowledge about the functioning of an IPO, but we also need to know about the company in which we intend to invest. Therefore, it is essential to know:

1. 2. 3. 4. 5. 6.

The fundamentals of the firm The policies and the goals of the company The products and services offered by the business Their key competitors Their share in the current market The probabilities of their issue being successful

It can be very risky to invest without having this basic knowledge about the company. Let us consider 3 types of risks concerned in investing in IPO: BUSINESS RISK: It is essential to note if the firm has sound business and management policies that are in line with the standard norms. Researching business risk involves probing into the business model of the company. FINANCIAL RISK: Is the firm solvent and has enough funds to bear short-term business setbacks? The liquidity position of the company has to be considered. Researching financial risk calls for analyzing the companys financial statements, capital structure, and such financial information. MARKET RISK: It is advisable to check out the demand for the IPO in the market, i.e., the appeal of the IPO to other investors in the market. Hence, researching market risk involves examining the appeal of the corporation to current and future market conditions.
Anchor Investors Fail To Up IPO Performance
August 16th, 2011 by rupeetalk-news

Marqee institutional investors, which are also known as anchor investors for a companies Initial Public Offering (IPO) are proved useless as despite of the introduction of concept, two years ago, the performance of IPOs has been drastically falling. Nearly two-thirds of public offers that had anchor investors since 2009, are trading below their lower initial sales price. In various cases, it is down as 85 per cent of their value, which is a clear indication that anchors are not providing any comfort. As stated by Mr. M S Apte, President of Mumbai-based Investors Guidance Forum, Since most of the IPOs in the last two-years have failed, the anchor investors presence or price has left less impact on retail investors. He further added, The price at which a stock is allocated to anchor investors has less relation with the long-term value or the book value of the company.
Observations: 1. The ongoing turmoil in capital markets has been impacting IPO markets severely. The bad mood of capital markets have led 25 companies to call-off their IPOs during this 2011 calendar year. The probable amount that these 25 companies were planning to raise was to an aggregate of Rs 31,000 Crores.

2. All these 25 companies had valid SEBI approval in hand for their IPOs. Even then, couldnt open their IPOs within the validity period of one year from the date of SEBI approval. 3. Of these 25 companies, the list was largely featured with real estate companies and power companies. The list of real estate companies that called off IPOs include Lodha Developers, Ambiance Real Estate, Kumar Urban Developers, Neptune Developers, BPTP, Raheja Universal and Lavasa Corporation. The list of power companies that called off IPOs include Sterlite Energy, Jindal Power, Avantha Power and IND Bharat Power Infra. Other major companies include Reliance Infratel, Glenmark Generics, Gujarat State Petro Corp, One97 Communications. 4. Besides these companies, few companies have already announced IPO deferrals even though approval for SEBI validity for their IPOs still remain. For instance, Micromax has already annoucned IPO deferral, owing to the market conditions. 5. Further, there are atleast 10 other companies who have valid SEBI approval in hand and are left with just 2 months in their validity period of one year from the date of SEBI approval. Such companies include Pride Hotels, Tara Jewels, etc. 6. This surely will impact the Indian corporate's ability in fund raising to finance their expansion projects resulting in slow down in capacity building and job creation. 7. Further, this trend in IPO market will surely set panic in the minds of the Private Equity (PE) funds, as they will be unable to exit from their investments as they generally invest in unlisted companies in the hope of exiting through IPOs. Some such companies are Lavasa Corporation (the investors were Axis Bank, ICICI Bank), BPTP Limited ( the investor was JP Morgan ( through Harbour Victoria Investment), One97 communications (the investors were SAIF Partners, Intel Capita, Silicon Valley Bank, SAP Ventures), Micromax (the investors were TA Associates, Sequoia Capital India, Sandstone Capital, Madison India Capital), You Broadband (the investors was CVC), Avantha Power (the investor was KKR), IND Barath Power (the investors

2011 Sr. No. Company Approval Date 1 Reliance Infra Tel Limited 11-Jan-10 2 Lodha Developers Limited 21-Jan-10 3 AMR Constructions Limited 29-Jan-10 4 PNC Infratech Limited 2-Feb-10 5 Ambiance Limited 4-Feb-10 6 PCI Limited 19-Feb-10 7 Ankita Knitwear Limited 26-Feb-10 8 Glenmark Generics Limited 8-Mar-10 9 Kabirdass Motor Company 9-Mar-10 10 Kumar Urban Development 22-Mar-10 11 Sterlite Energy Ltd 5-Apr-10 12 Neptune Developers Limited 29-Apr-10 13 BPTP Limited 3-May-10 14 Gujarat State Petroleum Cor 10-May-10

Valid Till Indicative 11-Jan-11 20-Jan-11 28-Jan-11 1-Feb-11 3-Feb-11 18-Feb-11 25-Feb-11 7-Mar-11 8-Mar-11 21-Mar-11 4-Apr-11 28-Apr-11 2-May-11 9-May-11

IPOsize 5000.00 2500.00 145.28 175.00 1293.00 48.46 25.00 570.00 60.00 320.00 3000.00 378.16 1500.00 3067.16

Status Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired

15 Asian Business Exhibition & 14-May-10 Conferences Ltd 16 Jindal Power Limited 28-May-10 17 Avantha Power & Infrast Ltd 6-Aug-10 18 ICOMM Tele Ltd 13-Aug-10 19 Virgo Engineers Limited 1-Sep-10 20 Raheja Universal Ltd. 3-Sep-10 21 Sel Textile Limited 9-Sep-10 22 Greatship (India) Limited 6-Oct-10 23 IND-Barath Power Infra Ltd 11-Oct-10 24 One 97 Communications Ltd 25-Oct-10 25 Lavasa Corporation Limited 11-Nov-10 26 Sumatex Limited 1-Dec-10 27 You Broadband & Cable in l 13-Dec-10 28 Endurance Technologies Ltd 14-Dec-10 29 AGS Transact Technologies 31-Dec-10 2012 30 Tara Jewels Limited 4-Jan-11 31 Pride Hotels Limited 13-Jan-11 32 Micromax Informatics Limited 14-Jan-11 33 Betul Oil Limited 19-Jan-11 34 Marck Biosciences Limited 2-Feb-11 35 Tara Health Foods Limited 9-Feb-11 Total probable fund raising through IPO Source : SMC Global Securities Limited SEBI approval for IPO till june 13 2009

13-may-11 27-May-11 5-Aug-11 12-Aug-11 31-Aug-11 2-Sep-11 8-Sep-11 5-Oct-11 10-Oct-11 24-Oct-11 10-Nov-11 30-Nov-11 12-Dec-11 13-Dec-11 30-Dec-11 3-Jan-12 12-Jan-12 13-Jan-12 18-Jan-12 1-Feb-12 8-Feb-12

79.41 7200.00 1250.00 200.00 340.50 864.00 102.16 328.35 1140.00 120.00 1663.31 38.24 360.00 460.00 170.00

Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired Expired

50.00 Expired 125.00 Expired 426.04 IPO Deferred 100.00 Expired 55.34 Expired 160.00 EXpired 33,324.41

Firms having SEBI approval for IPOs Approx. Size (Rs cr) Adani Power 5500.00 NHPC 2060.00 Future Ventures India 2000.00 Oil India 1400.00 Pipavav Shipyard 700.00 C Mahendra Exports 244.04 Pradip Overseas 200.00 Mahindra & Holiday Resorts (India) 189.92 Mayajaal Entertainment 125.00 Arss Infrstructure Projects 120.00 Gini & jony 110.00 Raj Oil Mills 106.02 Kabirdass Motor Co. 81.28 Excel Infoways 77.27 Globus Spirit 77.00 Infinite Computer Solutions (India) 67.46 Chiripal Industries 53.00 Astec Lifesciences 49.22 Sea TV Network 46.02 Mid Valley Entertainment 43.00 Usher Eco Power 36.00 Rishabhdev Technocable 26.43 Thinksoft Global Services

How companies divert funds raised via IPOs

By Anand Adhikari Bharatiya Global Infomedia Ltd used money raised through an initial public offer (IPO) to pay off intercorporate deposits, which are essentially unsecured loans from other companies . The Noida-based IT solutions company had taken these loans months before the IPO. The risky nature of the borrowed funds figured nowhere in the issue prospectus. RDB Rasayans Ltd, a Kolkata plastic products manufacturer, diverted IPO funds to a financially weak group entity in the real estate business. This was not only highrisk but also unrelated to the core business. IT solutions provider Taksheel Solutions Ltd, a Hyderabad company, made a factual misstatement in its IPO prospectus about a land allotment that was actually in the process of being cancelled at the time when the prospectus was filed. These cases figure in an interim order dated December 28, 2011, by which markets regulator Securities and Exchange Board of India (SEBI) debarred half a dozen companies and their promoters from accessing the capital market , because they misused IPO funds. SEBI's investigation into these IPOs has a happy ending, at least as far as investors are concerned. But it has raised uncomfortable questions about a host of institutions that supposedly safeguard investors' interests. One of these guardians is the Registrar of Companies, which is part of the Ministry of Corporate Affairs, and which has wide-ranging powers to go after those who misuse IPO funds. There are also auditors, who put their stamp of approval on status reports on the use of IPO funds. These reports are submitted to stock exchanges every quarter, and every year to the Registrar of Companies. Then there are independent directors on company boards, as well as audit committees, which are supposed to act as the eyes and ears of shareholders. And, of course, there is SEBI. "SEBI has a limited mandate of regulating companies," says Saurabh Agrawal, director at Kennis Group, a financial consultancy in Mumbai promoted by a group of chartered accountants. For over a decade, the restricted mandate has made it hard for SEBI to monitor the diversion of IPO funds to uses not indicated in the prospectus. About a year and a half ago, the regulator tried yet again to increase its powers to monitor how companies use funds, by making a representation to the Parliamentary Standing Committee on Finance for the new Companies Bill. But the Ministry of Corporate Affairs denied the request, saying such monitoring is the domain of the Registrar of Companies, which must do this in coordination with SEBI. Pavan Kumar Vijay, Managing Director of Corporate Professional Group, a Delhi company that advises companies on governance, says SEBI can step in when it detects an abnormal stock price movement. In fact, this was how its investigation into the six IPO cases began - their stock prices plunged on the first day. This was the first time SEBI expanded an investigation to minutely study offer documents and verify disclosures.

Inadequate regulation Promoters get a free hand to play around with investors' money because there are many regulatory gaps in monitoring IPO proceeds. For example, after the IPO, a company is not required to update SEBI on how proceeds are being used. It only needs to file a quarterly status report with the stock exchange where it is listed (see box: System of Silos). Take the case of Pradip Overseas, which raised Rs 116 crore from the public in March 2010 to set up a textile special economic zone (SEZ) in Gujarat and a factory in it. Two years on, the Ahmedabad company has used just Rs 5.15 crore of some Rs 100 crore earmarked for the project. "We have shelved the SEZ plan," says J.S. Negi, an independent director. Indeed, the IPO document contained hints: it said the company had acquired only around 85 hectares of the 100 required for the project. There was no certainty about acquiring the rest. The document also said the company had yet to order some Rs 57 crore worth of plant and machinery, although production was to start in January 2011. Now Pradip Overseas blames the government for burdening SEZs with Minimum Alternate Tax. But those are issues that the company and merchant bankers should have highlighted for investors. Soon after the IPO, Pradip Overseas changed the IPO object clause to use the proceeds as margin money for working capital. "The Registrar of Companies has more powers to regulate companies," says Kennis Group's Agrawal. But sometimes it does not act, and when it does, it is likely to be delayed. Virendra Jain, investors' rights activist and founder member of Midas Touch Investors Association, says: "The Registrar of Companies will know only a year, or one and a half years, after reporting, because of annual filing of documents," he says. The registrar does not monitor companies as a matter of course, but may act if it comes across information that warrants an investigation. The practice of promoters changing the IPO object clause after raising money from the public has become rampant. "The auditors' limited review records the change in the object clause, but doesn't go beyond it or probe the changes for malafide intentions," says a chartered accountant on condition of anonymity. Plugging the loopholes The vagueness of SEBI's format for the quarterly disclosure is convenient for unscrupulous promoters. It does not require details of the company's investments in mutual funds or securities, nor of interest on such investments. It also does not require details of inter-corporate deposits (ICDs) and money lent to friends and relatives. Promoters can park money in high-risk ICDs or siphon it off by lending to shell companies in the guise of Rs investment in high-interest liquid instruments'. "SEBI can change the reporting format for utilisation of IPO proceeds," says Corporate Professional Group's Vijay. He says it should require details about ICDs and mutual fund investments. Rajeev Agarwal, a full-time director at SEBI, says his organisation is taking steps to make disclosure norms more comprehensive. "We are reviewing the entire IPO process," he says. Until the reporting is made stringent, companies will continue to play with investors' money. Take the case of Bedmutha Industries, an iron and steel company in Nashik, Maharashtra. More than Rs 60 crore of the Rs 92 crore it raised through an IPO are in cash credit, ICDs and advances to unspecified parties

for purchase of assets. In their limited review, auditors Patil Hiran Jajoo & Company have given no break-up of the advances or ICDs. Another example is the Rs 118-crore IPO in September 2010 by New Delhi apparel and accessories retailer Cantabil Retail. The company has used only Rs 11 crore of the Rs 56 crore earmarked for a new manufacturing facility and retail network expansion. "We have extended the time for attainment of the object of IPO proceeds by two years by passing a special resolution in January 2012," says Company Secretary Poonam Chahal. Rather than parking unused money in safe bank deposits, the company has chosen to invest Rs 30 crore in the units of mutual funds whose names are not disclosed. "Any specific name would be difficult to give as it keeps on changing," says Chahal. A spate of resignations by Cantabil's CFOs and compliance officers should have alerted the Registrar of Companies to trouble. Chahal says the exits were career enhancement moves. "No other specific reason is associated with them," she says. SEBI is now aggressively going after merchant bankers who play a key role in IPOs, and also doing due diligence on its own. In the six cases SEBI investigated, it has held merchant bankers accountable for overlooking factual misstatements in the prospectus and nondisclosure of relevant facts. It has debarred Almondz Global, PNB Investment Service and few other merchant bankers from handling public issues. There may be limits, though, to what merchant bankers can do. "It is not practical to expect them to independently verify all debtors and creditors," says Vijay. While doing due diligence, merchant bankers have to rely on reports, especially those by valuers, solicitors and auditors. However, Rakesh Singh, Head of Investment Banking at HDFC Bank, says that merchant bankers do have the right to ask tough questions, and even to insist on a fresh audit if they are not satisfied with any numbers. That is a possibility, now that SEBI is getting tough. The Companies Bill, likely to be passed in this Budget session, could bring investors some peace of mind. The Bill says that shareholders who are not in favour of a change in the object clause have the right to exit the company. "The company has to give minority shareholders an exit option," says Vijay. But the larger issue of regulatory gaps remains. Reproduced From Business Today.

SYSTEM OF SILOS STOCK EXCHANGE: Gets quarterly updates on use of IPO funds but does not go into the nitty-gritty of how they are used SEBI: Does not monitor use of IPO funds but investigates abnormal stock price movements and misstatements in offer documents MINISTRY OF CORPORATE AFFAIRS/REGISTRAR OF COMPANIES: Can investigate use of IPO funds but companies file updates only every 12 to 18 months MERCHANT BANKERS: Undertake due diligence and check prospectus facts but rely on auditors, solicitors and valuers; do not check land records or position of debtors and creditors

INDEPENDENT DIRECTORS: Supposed to be shareholders' eyes and ears but often do not ask tough questions, and may even be complicit in misuse of funds AUDITORS: Prepare reports in outdated format prescribed by SEBI and record changes in IPO object clause but give no details of securities or loans to group companies or other borrowers
3 COMPANIES WITHDRAWN IPOs

As many as three companies have withdrawn their initial public offerings (IPOs), together worth over Rs 1,800 crore, this year so far amid poor market conditions roiling investor sentiment. Packaging materials maker Plastene India, healthcare firm Goodwill Hospital and auto parts manufacturer Samvardhana Motherson Finance, have shelved their IPOs since the beginning of this year. These entities were aiming to mop up a total of Rs 1,805 crore from the capital market. Moreover, four of the six companies that made their debut on the bourses, are trading well below their issue price, according to the data available on the stock exchanges. Experts opined that withdrawal of initial share sale offers and negative returns for investors from stocks listed this year reflect the persisting weakness in the broader market. "There has been a lower appetite among investors for IPO in a weak secondary market, which was one of the prime reason for withdrawal. Besides, higher valuation was the another factor," Geojit BNP Paribas Research Head Alex Mathew said. However, he pointed out that companies that have sound fundamentals and offers attractive valuations would continue to lure investors. The benchmark 30-share Sensex has slumped significantly since January when it was trading at 17,000 levels. It finished the today's trade at 16,183.26 points, up 30.51 points from the previous close. Plastene, which sought to raise up to Rs 78 crore through IPO, became the latest victim of the poor market condition in the middle of the month. The IPO has been withdrawn on the final day after the issue could muster only 29 per cent subscription. Samvardhana Motherson Finance Ltd, the holding company of the automotive component manufacturing group Samvardhana Motherson, too had withdrawn its Rs 1,665 crore IPO in May. The company saw its issue subscribed just 23 per cent. Besides, Goodwill Hospital was another one that cancelled its Rs 62 crore IPO in January. The issue, which was opened for seven days, withdrew its share sale offer on the last day as it could only generate a subscription of 0.01 times.

Galaxy Surfactants had pulled out its IPO in May last year. Interestingly, in 2012, at least 17 companies had to give up the approvals they had obtained from the securities market regulator for their IPOs, according to SMC Global Securities. However, these withdrawals have not stopped others to line up their issues. Speciality Restaurants, had entered the capital market on May 16 received an over subscription of 2.4 times on the final day. Moreover, four entities -- Tribhovandas Bhimji Zaveri, state-owned NBCC, commodity exchange MCX and Olympics Card which got listed on the bourses are trading below their issue price. However, tutorial firm MT Educare are trading above the issue price, while BCB Finance remain unchanged. Going ahead, "I expect sluggish market conditions would continue and some recovery would be seen in the second half of the year. The move would seen companies coming out with their IPO plans," Mathew added.