Earlier, it was taken for granted that when companies tap the capital market to raise funds through initial public offerings or IPOs, the money would be used for re-investing in the company’s infrastructure, expanding the business, for working capital purposes or even retiring high-cost debt. But those days are long gone.

Of late, the number of companies issuing fresh equity in the IPO market is in a minority. The funds raised through IPOs seldom go to the company. In fact, the selling shareholder(s) — usually the promoter(s) or private equity investor(s) or even employees — often garner a large share of the funds raised through the IPO.

Fifteen companies have so far hit the IPO market and collected about ₹20,000 crore in 2018. But nearly 70 per cent of the funds raised (₹13,750 crore) went to promoters, PE investors and the staff of these companies.

Not just private sector players such as ICICI Securities and Galaxy Superfactants, even PSUs such as Bharat Dynamics, Midhani and Hindustan Aeronautics have tapped the market only to bloat the promoter’s kitty. Some companies, such as Bandhan Bank, and IndoStar Capital have combined their IPOs with the OFS to give partial exit to the promoters and PE investors.

Pricing is key

The IPO of ICICI Securities, the stock broking arm of ICICI Bank, sailed through despite having received bids only for 87.64 per cent, as it came out with an OFS. The parent ICICI Bank trimmed the issue size to 6.77 crore shares, against the original offer of 7.725 crore shares.

According to the Securities and Exchange Board of India’s ICDR Regulations, an IPO needs minimum 90 per cent demand for the total offer size to go through.

To ensure IPOs go through, companies often extend their bidding window by a few days and even reduce the price of the issue. Some companies were forced to withdraw their IPOs even after reducing the price or extending the time, due to under-subscription.

However, despite muted demand, ICICI Securities sailed through without reducing the price or extending the time. The issue was completed successfully, as ICICI Securities needed to dilute only 10 per cent stake of its total 322.14 million equity base, according to SEBI guidelines. The shares of ICICI Securities are currently hovering around ₹380 against the issue price of ₹520. The stock’s peak was ₹463 on the NSE.

For better price discovery, the rules could be tweaked, so that OFS is made only as a secondary or follow-on-offer once a company has already listed through an IPO. The key advantage here is pricing. Secondary market trading will give investors, especially retail investors, a good idea of the fair price of the stock.

No pride now

For investors, it makes sense to put money into the shares of companies which have strong expansion plans. Going forward, if these companies perform well, both financially and on the bourses, the investors get their due. But an OFS is just a transfer of ownership, no new funds are being brought in to fund expansion. Therefore, the earnings growth of companies taking the OFS route may not match that happening through expansion.

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