IPO Documents Offer No Strategy to Deal with Disruption | CORPORATE ETHOS

IPO Documents Offer No Strategy to Deal with Disruption

By: | November 24, 2017

Large number of small, medium and large companies are tapping the primary market as bull run continues in equities as mutual funds and large institutional investors rush to be in the thick of action.

Most of the initial public offerings (IPOs) are quite overpriced but when we examine the offer documents there are not enough noteworthy features that justify that kind of premium. Most documents offer suffer from lack of imagination and doesn’t even guarantee that key promoters will stand by the company. One real estate company seeking funds to expand in a particular region haven’t even identified the land for construction.

In one instance, there was a company declaring that it hadn’t applied for mandatory shops and establishments license in Gujarat which is mandatory for functioning of the company.

Most of the documents talk about the issues related to cash flows, legal proceedings against promoters, unsecured loans, exchange rate fluctuations and even lack of own building for registered office or corporate office but none talks about the larger disruptive forces that can kill the company itself in no time. Most of the cases the risk factors outnumber the strengths of the company in their domain of business. They seem to take an anticipatory bail from investors lest something goes wrong in future.

No word on disruptive forces
Disruptive technologies have offlate threatened the existence of major players in various industries. For eg. Artificial intelligence in IT industry, stock broking firms are already threatened by discount brokerages and algo trading, the automobile industry may be threatened by electric cars and so are petroleum refining companies. Telecom companies can be disrupted by the emergence of new technologies and operating systems.

Rajendran VelayudhanChettiar, Managing Director of Kerala-based Capstocks and Securities (India) Pvt Ltd said that no brokerages in Kerala have evolved an algo trading mechanism to do trading even as larger institutional players have cornered the market with this technology. Shivdas B Menon, Managing Director of Kochi based Sterling Farm Research and Services Pvt Ltd said that R&D and developing new products hold the key to success in a any business.

Strangely, most of the offer documents are silent on their R&D or innovative abilities to tide over market disruptions.

Laws Turn Strict
Rising non-performing assets (NPAs) of banks and the need to curb wilful defaulters among corporates had forced the Union Government to amend the Insolvency and Bankruptcy Code (IBC) whereby promoters are not allowed to bid for the distressed company when it comes up for auction. The new ordinance which was approved by the President of India stipulates that corporate entitites, promoters and associate companies undergoing the insolvency resolution or liquidation under the Code will not be eligible for bidding for the stressed assets. The rising NPAs have eroded the profitability of banks and also derided economic growth. This called for a massive recapitalisation exercise for banks.

According to Ajay Tyagi, Chairman of Securities and Exchange Board  of India (SEBI), well governed companies have performed better than less governed ones which can be gauged from the operating results and market capitalisation of listed companies.

The onus of deciding to invest in a company lies with the investor but regulators should also see that companies that conform to basic minimum governance standards should tap the market for funds.