Sucheta Dalal on DLF - Don't lose focus

A few months ago, 17 investor associations in one of their regular interactions with the Securities and Exchange Board of India (Sebi) passed a unanimous resolution appreciating the regulator’s tough stand on the DLF issue. That was when Sebi had refused to clear DLF’s earlier proposal to relist its shares and raise Rs 13,500 crore from the capital market.

Sebi had refused to clear the initial public offering (IPO) until the ministry of company affairs (MCA) resolved the issue of DLF’s minority shareholders. A little later, the regulator raised pertinent questions about the absurd disparity in the valuation of DLF’s land bank as well as the quality of its disclosures. In fact, Sebi told its board of directors that the runaway increase in realty valuations was triggered by DLF’s fund-raising plans and the manner in which DLF’s properties were valued. In that board meeting Sebi cleared the proposal of IPO ratings after accepting that investors do need expert help in understanding complex disclosures.

But only a part of the original investor concerns were addressed when Sebi finally cleared its revised prospectus (for the record, Sebi only offers comments on the offer document and does not specifically clear it). Investor associations which praised Sebi’s handling of DLF in the past, aren’t too happy with the regulator anymore. They are surprised that the new valuation norms applicable to DLF conveniently, do not apply to the issue nor did the IPO have to be rated.

In fact, Midas Touch Investors Association, a Sebi registered group, insists that disclosures in the DLF prospectus remain inadequate. It says that though Sebi had assured the association that the lead managers to the issue would be asked to respond to its concerns, the IPO was cleared without this happening. Specifically, it has questioned the lack of transparency about the big increase in profits through sales to group companies, it has not received any reply. If that happens to an investor association, how is an ordinary investor, whose awareness level is poor, assess a complex public offering?

One example of pitiable investor awareness is the story of DLF’s minority shareholders, who were slated to receive what can only be described as a jackpot deal after they fought for their rights. DLF’s plan to re-list its shares in 2006 was stymied after it attempted to deprive 1,100 minority shareholders (who had held on to their shares, when these were delisted approximately four years ago) the massive profits arising out of its capital restructuring. These shareholders moved court and also petitioned the regulator and the media, which forced the company to include them in the restructuring bonanza.

We now discover that barely 280 investors availed of the company’s massive debenture-to-bonus share offer that gave each minority shareholder a minimum of 31,328 share (face value Rs two) valued at a minimum of Rs 1.56 crore even before the IPO opens. If the issue trades at a premium on listing, the valuation could be significantly higher. Surely, a savvier or better-advised company would have done its homework and evaluated the cost of taking 280 minority investors along, or buying them out before the restructuring with a lucrative offer. That so many minority investors missed this bonanza again reflects poor investor awareness in India, it also shows that DLF could have avoided much of the damage to its reputation with smarter planning and an honest effort to contact its investors.

On the eve of DLF’s IPO, some of the same arrogance is on display again. It appears that DLF’s distributors and brokers are doling out as much as 3 per cent in cash kick backs to investors in their effort to lure them into subscribing. The commissions range from Rs 50 to Rs 225 per form. At the same time there is an attempt to whip up frenzy and create an active grey market in the scrip. In addition, DLF hopes to rope in more retail investors by permitting them to apply for partly paid up shares, but this too has a catch. Those who are lured by cash incentives on application forms and the option of paying only Rs 27,000 per application for shares worth Rs one lakh need to be aware that part-paid shares cannot be sold on listing.

This is important if they have funded the purchase with borrowed money. The remaining money has to be coughed up after allotment and there will be no opportunity to flip them on listing and cash in on any immediate price run up. Shouldn’t Sebi have looked closely at all these issues? Especially since it had made an example out of DLF to its own board and the company has a fairly patchy record of regulatory compliance (Sebi has penalised it for at least two other market violations besides its attempt to deprive minority investors of the benefits of capital restructuring).

Ironically enough, while DLF has a poor compliance record, it has built a fairly formidable record for the quality of its construction and its ability to deliver classy projects and modern townships, especially in and around Delhi. As the first of the mega IPOs, that are set to take away considerably liquidity from the Indian capital market, large institutional investors believe that the many sales gimmicks and incentives will indeed help the DLF IPO sail through despite what is clearly an aggressive pricing strategy.

The question is, how will retail investors, who follow the dictum of caveat emptor make up their minds? If they only go by fundamentals and also factor in the decisive slow down in the realty market, there is a good chance that they would have lost an investment opportunity. Equity investment is indeed a risky business.

Via Indian Express

Examine the coil to understand the spring

Sucheta Dalal

Nissan Copper is a scrip that few had heard about until the last trading day of 2006. On that day, this company made the most incredibly brazen debut on the two national bourses. From a subdued listing at Rs 40, the share price soared to an amazing Rs 136 before closing at a high of Rs 131.

But the price does not even begin to reveal the extent of manipulation in a single day of trading. Nissan Copper, which manufactures copper products, entered the market with a capital of 1.45 crore by making an Initial Public Offering (IPO) of 64.10 lakh shares priced at Rs 39. It raised Rs 25 crore to fund a Rs 35 crore expansion programme, where the balance Rs 10 crore is being funded through term loans.

The run up to the issue was bereft of any hype, probably with good reason. At least three brokerage houses and an investment advisor openly told investors to avoid the issue. One specifically said that post-issue appreciation seemed difficult because of the big jump in capital, prior to the issue by way of a hefty bonus that the promoter group had awarded itself. Yet, Nissan Copper was over-subscribed 4.7 times and only one large brokerage seemed confident of appreciation on listing.

A popular investment website probably provided a clue to the possibility of price rigging. When the site carried a poll on December 8 to find out whether the share would be listed above Rs 50, a surprising 61% said it would. There seemed to be little basis for such optimism and sure enough the scrip debuted at Rs 40 as against the issue price of Rs 39.

Now consider what happened on Friday, December 29. Nissan Copper was listed by the National Stock Exchange (NSE) as the most active share that day, ahead of Reliance, Rcom, India Bulls, Paravsnath, Satyam Computers and others, with a whopping Rs 670 crore worth of shares being traded that day. In terms of numbers, the company which offered 64 lakh shares for public subscription saw 6.99 crore being traded on the NSE on listing day and another 6.11 crore shares being traded on the Bombay Stock Exchange (BSE). Add it up and you have nearly 10 times the capital being traded on a single day.

This level of manipulation was possible only because circuit filters do not operate on the day of listing. The large trading volumes make it clear that the transactions were part of a deliberate manipulation of the share price. This is not the first time that the share price has been outrageously manipulated on listing day. What makes Nissan Copper different is that it is the first time this has happened after the Securities and Exchange Board of India’s (Sebi’s) Integrated Market Surveillance System (IMSS) has turned operational. Since this system is supposed to track and integrate trading data from the stock exchanges, clearing corporations and depositories, theoretically it should be absurdly easy for the regulator to initiate action in the quickest possible time and send a powerful signal to the market that IPO manipulation has got to stop.

The regulator is already on the case. A top Sebi source tells us that two Foreign Institutional Investors (FIIs) as well as persons connected to the company have been identified and the data is being processed for further action. Sebi now needs to demonstrate the IMSS’s capabilities by swift and stringent action.

Incidentally, IPO manipulation is not restricted to post listing price rigging. The Rs 5,000-crore Cairn Energy IPO, which marked the first time that an international company was listing on Indian bourses, also turned fairly sordid. The market was rife with rumours about ‘corporate rivals’ trying to damage the IPO when the market corrected sharply on the day the issue opened. They almost succeeded, except for the fact that institutional investors connected to some of the investment banks ensured a 1.1 time over-subscription on the day the issue opened. In the next few days, hectic lobbying with insurance companies and mutual funds brought in more subscriptions for this high priced issue. Some retail investors also invested. Until the subscription lists closed, the issue showed an over-subscription a little more than two times. However, on the very last day, a one-time subscription vanished as large institutional investors withdrew their bids. According to sources, the withdrawal of bids was by a group of entities connected to two of the lead managers—DSP Merrill Lynch and JM Morgan Stanley. Here too, Sebi has written a letter to the lead managers seeking their comment on the withdrawal.

In fact, a detailed investigation of the Cairn IPO to get to the bottom of how the issue was priced, how subscriptions were canvassed (especially institutional investment) and the basis on which the price and size of the issue was decided is important to ensure the health of the primary market.

While Sebi has accepted a recommendation to introduce mandatory grading for IPOs, if cleared by its board of directors, it is important to remember that such grading will only deal with quality of disclosures made in the prospectus. They will still not help investors to figure out various deals that go into ensuring full subscription of over-priced issue or understanding the post-issue price manipulation. These remain the domain of the regulator and the Nissan Copper and Cairn IPOs show that it has its work cut out.

—Email: suchetadalal@yahoo.com