Float cover is quite in fashion

Move to protect firms from litigation by investors.

Companies that want to raise funds from the capital market through initial public offers (IPOs) are rushing for risk cover to protect themselves from litigation by investors.

Tata Consultancy Services (TCS) and National Thermal Power Corporation (NTPC) had taken risk cover before going public. TCS, which raised about $11 billion, is understood to have purchased a risk cover known as a transactional insurance policy for about $90-130 million. NTPC, being a government-owned entity, has taken a more conservative risk cover.

A number of companies were seeking transactional insurance cover before going in for IPOs, said Praveen Vashishta, CEO and managing director of Howden India, an insurance broking entity.

The size of the risk policy depended on the size of the issue, the potential market capitalisation of the company and the country where the issue was raised, he added.

"When a company goes for an IPO, it has to declare a lot of information about itself. Based on this, investors make their investment decision. If the information is proved wrong and results in a loss for investors, they can take the company to court," Vashishta said.

With at least 50 per cent of the issue size being earmarked for qualified institutional buyers (QIBs) and foreign institutional investors, the possibility of litigations can not be ruled out.

Shareholders of China Telecom took the company to court questioning its accounting practices after the company came out with an IPO. Investors have received nearly $16.3 million from companies that made misleading or false statements in their letter of offer in the US.

With FIIs participating in domestic IPOs in a big way, it would not be long before they took companies to court, David Howden, chief executive of the London-based Hyperion Insurance Group, said. Hyperion was instrumental in TCS purchasing a transactional risk cover for its offer.