Barely half the proceeds in the past three years used in earmarked projects.
Resources mobilised through Initial Public Offers (IPOs) in the past three years have turned out to be a flop show for investors. First, a severe post-listing value erosion and now no growth in net earnings in sight, as many promoters have not fully utilised IPO proceeds on the objects stated in the prospectus. In fact, many have changed the object for which the IPOs were launched, by obtaining approval of the majority shareholders, mostly the promoters themselves.
According to Section 61 of the Companies’ Act, the terms of contract mentioned in the prospectus can be changed only by shareholder approval. Perhaps, then, the time has come to consider non-promoters’ approval to make a change for post-IPO utilisation.
A survey of 89 companies that mobilised Rs 42,462 crore in these three years indicated only 46 per cent of IPO proceeds have so far been used for expenses on the projects earmarked. A fourth has been parked with banks and debt schemes of mutual funds and eight per cent set aside for general capital purposes and working capital requirements. So, a rupee in every three rupees from an IPO is with the issuers, the promoters.(Click here for table)
Sachin Joshi, executive director & chief financial officer, Angel Broking, said, “The corporates had raised resources with the intent of business expansion. However, due to delayed recovery in global economies, pessimism set in, leading to postponement of resource utilisation.”
What can the Securities and Exchange Board of India (Sebi) do in such a case? Sandeep Parekh, former legal advisor to Sebi and founder of Finsec Law Advisors, said, “Sebi works on a disclosure philosophy, rather than seek to decide where a company should invest. Public offer norms mandate disclosure of how funds will be allocated. But that does not mean the object cannot change, based on market conditions. In fact, if the shareholders approve, as company law requires, the company can change the purpose of the fund utilisation. The listing agreement also provides for disclosure for change of utilisation of funds, which is predicated on it being legal. Sebi norms mandate quarterly disclosure of fund utilisation till these are exhausted.” He feels: “Sebi does not and should not have a problem with how funds are deployed, as that is a difficult call the management must take.”
Under IPO guidelines, the company can change the object after an IPO after getting postal ballot approval from shareholders. Thus, A2Z Maintenance, which had a public offer in December 2010, revised the objects in August this year through postal ballot, changing project costs for subsidiaries and transferring funds for general corporate purpose. So, too, with Claris Lifesciences, JSW Energy and Pradip Overseas.
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IPO guidelines have enough loopholes that help promoters sidestep full disclosure of funds’ end-use. For instance, many companies have deployed unutilised funds in mutual funds without disclosing the details of the schemes and the returns they are earning. Nevertheless, these newly listed companies have not done well in the quarter ended September. While aggregate net sales increased by 34 per cent, net profit was down 39 per cent.
As the companies that had raised funds were unable to use these for stated objectives, the IPO market is likely to remain dormant for some more time. Said Joshi, “Considering the uncertainty in Europe, there is not much appetite for any fresh IPOs in the market, as investor sentiment is at its lowest.”
Nirmal Jain, chairman, India Infoline, said, “Given the illiquidity in the market and poor performance of several IPOs since long, Sebi can consider a proposal asking investment bankers who have managed the issue to do market making for at least one month after listing.” This could, he said, also help control price rigging and volatility.