PSU IPOs fare better than private ones

Study shows PSUs have had lesser losses for investors


Sweta Ranjan | December 28, 2010

State owned companies' initial public offerings (IPOs) have been more beneficial for investors' in the past decade than private companies, which tend to price their offers at steep valuation. A study of 243 IPOs that were listed between 2001 and 2009 shows that stocks such as Maruti Suzuki and Indian Bank have returned more than companies such as DLF and Future Capital Holdings which led to losses for investors. 

Virendra Jain, who runs a non-profit organisation, Midas Touch Investors' Association (MTIA) conducted a study on 243 IPOs that were listed between 2001 and 2009, shows that the wealth creation in PSU IPOs handled was subsequently higher than that of private companies. The study says that more than 50% (121 out of 229) of private companies IPOs incurred losses.

The net wealth creation was 68% amounting to Rs 72,866 crore with a compound annual growth rate (CAGR) of 18.58 %. The much reviled PSUs were responsible for creating wealth to such an extent. PSUs raised Rs 24,728 crore through IPOs which made a net gain of Rs 39,145 crore. Private companies IPOs made a lower net gain of Rs 33,721 crore while they raised more than three times than PSUs - Rs 82,645 crore. Percentage of gains made by PSUs were nearly 300% more than that made by private companies and their CAGR was nearly three times of that achieved by private companies. On the launch of his book "wealth creation and destruction through IPOs in India 2001 to 2009" says Jain, "The reason for such huge wealth creation by PSUs was one: reasonable pricing of their IPOs."

The book reveals that Tata Consultancy Services Ltd (TCS) IPO resulted in a gain of Rs 12119 crore and was the biggest wealth creator of the decade. It was closely followed by NTPC, a PSU, creating wealth of Rs 11,883 crore. PSUs exceptional performance in wealth creation for its shareholders is amply demonstrated in the list of 20 wealth creators which contains as many as nine PSUs, out of 14, which came out with IPOs during this period. 

Top 20 wealth destroyers contain 19 private companies. DLF Ltd tops the list. It destroyed a wealth of Rs 4595 crore, although its issue size was the second largest at Rs 9187 crore. DLF is followed closely by Reliance Power Ltd. which incurred a loss of Rs 4319 crore in the biggest
IPO amounting to Rs 10,123 crore.

"The study shows that one out of every two IPO of private company resulted in wealth destruction, and, more worryingly, three out of 10 were quoted at less than half their issue price," said Jain.

Minister of Corporate Affairs, Salman Khurshid launched the book. He said, “The book is an eye-opener. In the coming days we have to grapple with the issues raised in the book. In the draft new companies bill suggestions on compensation and empowering investors we have tried to take care of it.”

To facilitate speedier development of the economy some of the suggestions made in the study are mentioned below:

1. To increase the minimum securities to be offered in an IPO: it is suggested that minimum offers to be made to public be increased to 25% from 10% of the post-issue capital.

2. Broad benchmarks for premium of lines of ICAI (Institute of Chartered Accountants of India) : shares at a premium can be issued only by profit making companies for at least two years out of atleast three years with a minimum profit of Rs one crore or 20% of pre issued capital (excluding only issue size).

3. Disclosures in prospectus: A qualified professional(s) be entrusted the task to issue final
"Due Diligence Certificate" for the prospectus. Professionals to include chartered accountants and company secretaries. To ensure that they have the requisite knowledge and expertise to vet IPOs, a certification test may be started by National Institute of Securities Market. Only on passing out the test, the professional would qualify to undertake due diligence certification.

4. Process for dealing with objections in draft prospectus: in order to ensure sanctity of disclosures, a transparent process for dealing with the public objections made on draft prospectus be laid down.

5. Strengthening of grading: in order to make the grading more useful and prevent its likely misuse for disinformation to investors, the grading methodology and process should be made transparent. The grading agencies should be made accountable to the investors and responsible to regulator.

6. Monitoring end-use of funds: a joint committee, consisting of officials of the ministry of corporate affairs, SEBI and stock exchange, be appointed to coordinate and monitor end-use of funds raised through IPOs. And also companies desirous of changing end use of funds , for more than 25% given under each head in the prospectus, should be required to give an exit option to the share holders at a price which not in less than the issue price of the share in IPO.

7. Monitoring unusual movement in share prices immediately after listing and allotments made in IPO: SEBI should monitor all unusual movement in share prices and volumes. Immediately after listing investigate the participants’ dealings along with IPO applications and allotments and take actions in appropriate instances.

8. Monitoring Companies after listing: a policy for monitoring of companies on defunct stock exchanges may be prepared and responsibility entrusted to one of the working stock exchanges.

9. Compensation and empowering investors: Investors be empowered, under the SEBI Act, to seek redressal of their grievances and claim damages for delay beyond 60 days from the errant entity (ies).

10. Demat related issues: Opening and operation of demat account be simplified. Misuse in operation of accounts be eliminated through necessary guidelines. Charges for small investors be reduced.



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