|»5 Minute Wrap Up by Equitymaster|
On This Day - 9 APRIL 2011
Are 'well timed' IPOs for you?
In this issue:
Is it better to invest in gold or stocks? ...
'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold
But off late PE funds are investing in those companies that are waiting to be listed but have not done so yet. That's right. The PE funds are now investing heavily in companies that have postponed their IPO plans due to volatile markets. So one would ask as to how the PE funds would make money in such conditions. Well, they buy a stake in the company at valuations that are much cheaper than the company's planned IPO price band. This way, when the market stabilizes and the company goes ahead with its IPO, the PE fund would still earn a substantial return on its investment.
As per a leading daily, almost 79 companies have filed their IPO prospectuses in the past one year but have not gone ahead with their IPO plans due to market volatility. However, as many of them were planning an IPO to raise funds to meet expansion needs, they did welcome the PE investors. However, the PE funds gave them cheaper valuations than what they had demanded in the IPOs.
But we wonder as to whether these companies are actually good investments for the general investors. They happily lapped up the funds from the PE investors despite the fact that the latter insisted on lower valuations. And now whenever these companies come up with their IPO, it would definitely be at higher valuations, which the PE funds would insist upon. So who would gain out of this entire process? The company and the PE fund for sure. But what about the investors? They may just end up getting stuck with an extremely expensive stock. IPOs that are for whatever reason 'timed' as per market sentiments are almost always bad for retail investors.
Private sector lender Yes Bank has decided to withdraw the application it had filed to seek RBI's approval to open a branch in Bahrain. Canara Bank too has postponed its entry into the country. The largest public sector lender SBI already has two branches there. As a result of the crisis, it has relocated its Bahrain branch employees temporarily and also stopped routing fresh non-Bahrain business through that branch. It appears that the political tensions are going to keep banks and other investors away from this region for a while now.
We have made enough mistakes. It's time to realign moral standards. At this moment, India's highest economic need is higher ethical standards. The recent warning is the first step. The immediate next being a stringent code of conduct and business standards to make sure that companies follow codes in letter and spirit. Without that, it is mere rhetoric. As India gears up for the trajectory to 9% GDP growth rate, sound corporate governance is the harness without which every leap could end up in a great fall.
However, there is a word of caution here. We as individuals tend to indulge in unnecessary shopping when we have lots of cash. In the same manner, these companies also need to ensure that they do not end up buying unprofitable businesses.
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