Time was when wannabes had to grovel before the Controller of Capital Issues (CCI) for a modicum of premium while going public. In 1978, Colgate-Palmolive (India) (CPIL) was listed in India via an "Offer
for Sale" to reduce foreign holding, with shares priced at their face value of Rs 10 plus a Rs 15 premium, making the listing price Rs 25 per share. Colgate had been the darling of the share market with its generous dividend and bonus issues. Despite shedding the toothpaste-means-Colgate status, it is still quoted at around Rs 2900. In hindsight, the CCI was unduly niggardly and conservative in 1978, especially in the current milieu of free pricing even by loss-making companies. Colgate had envious reserves and surplus as well as market share in 1978.
Fast forward to 2025. Despite retail investors biting the dust with listing gains proving elusive and a mirage, the market regulator hasn’t tightened the regulations to prevent loss-making companies, who have piled up huge losses, from tapping the market to the detriment of the retail investors. They get away with hefty premiums, often in the range of 20,000% of the face value, by flaunting the merchant banker’s assessment that the future for the company is very bright. Touche! The truth is the entire system is gamed to facilitate promoter exit at mind-boggling valuation because the Offer for Sale (OFS) rides piggyback on the IPO. This is a flagrant conflict of interest situation—get an exaggerated and undeserved valuation so that the promoters and venture capitalists can dump their holdings gotten at par on the unsuspecting public. Yes, the IPO and the OFS prices are the same, and as far as the public is concerned, they are indistinguishable from each other. In a way for them, the shares emanating from the IPO and the OFS are fungible, like the currency notes. In such a licentious regime, promoters laugh all the way to their banks while retail investors are left holding the can.
One really doesn’t know why Qualified Institutional Builders (QIBs) play insidious ball with the promoters in this dubious game. They are the ones who participate in the price discovery process called book-building. They have no skin in the game under the Dutch model, where they are not thrust with the shares they have deigned to value. Under the French model, they are. In other words, if a QIB says he will be ready to take 10% of the IPO cum OFS at Rs 2000 when the face value is Rs 10, he cannot wriggle out. This is as it should be—you are careful when you have to taste the bitter pill yourself.
It is time the OFS is delinked from the IPO. It should be a standalone IPO, period. Promoters have to seek their fortunes in the post-listing market. Indeed, bourses discover the values much better over a period of time vis-à-vis the book-builders. In other words, the extant process of promoters dumping their holdings on the retail investors rather than in the relatively more transparent stock market must go. In such a milieu, the IPO price would be more realistic, what with the conflict of interest gone.
The SEBI earlier had a voluntary safety net mechanism in which retail investors could sell to the promoters up to 1000 shares should the market price fall below the issue price within six months. No serious player sticks his neck out by unfurling a voluntary mechanism. Far from making it a mandatory mechanism, the SEBI chose to throw the baby out with the bathwater by junking the voluntary mechanism itself. A mandatory safety net mechanism would make valuations conservative and realistic for the IPO. As it is, they are exaggeratedly smug in the belief that no harm is going to befall the promoters, merchant bankers, and book-builders.
Apart from the twin IPO reforms adumbrated above, the SEBI must bring back convertible bonds into the mainstream. Reliance Industries pioneered convertible bonds in India. And it should be voluntary. The sweetener is conversion at a concessional price vis-à-vis the market price. Let us say a company offers debentures with a face value of Rs 1000, carrying a coupon rate of 9% per annum interest. Within three years, a subscriber can, if she wants to, convert the entire debenture into shares at a 20% discount to the market price. Debenture holders would fall for this option if the company was doing well, as reflected in the quotation at the bourses. Otherwise, they would stay invested in the debentures, getting an interest of 9% per annum. A convertible debenture can also be partially convertible. Whatever it is, it has all the advantages of an ESOP, or employee stock option—a synergy in that your individual interest is aligned to the company interest.
The current IPO-OFS regime is grossly promoter-friendly and heavily stacked against the small investors. To be sure, the share market was conceived as a free entry and exit medium. Anyone missing the IPO bus could buy from the bourses if the share got a good reception in it. In fact, one sincerely feels small investors should avoid the IPO-OFS and instead bide their time to buy from the market when passions and frenzy cool down. The market sobers down irrational exuberance in the medium to long run.
The government should not allow the benighted public to stew in their own juices. Instead, it should usher in the IPO reforms on the lines adumbrated in this article. Otherwise, from the IPO-OFS, it will remain a perverted and inverted OFS-IPO, which is the reality—public offers subserving promoters more than small investors. As far as the public is concerned, it must refrain from the rat race, be it the primary market or the secondary. As Allen Greenspan, an ex-Fed Reserve chief, remarked a few decades ago—there is a greater fool out there. Meaning, if I buy a share for Rs 1,000, I do so in the hope there would be a greater fool to buy from me at Rs 2,000 and so on. The bubble bursts sooner or later. In view of the inherent risks in equity investment, an investment in mutual funds is safer with diversification—don’t put all your eggs in one basket—being the guiding spirit of fund managers.
S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues.
