IPOs. Our aversion to them is well known. Regular readers of the website know that we wouldn't touch most of them even with a 10 feet pole. How can we? Most available evidence shows that they are designed in such a way so as not to benefit the minority investors. Little wonder, someone has aptly termed them Imaginary Profits Only.
The recent spate of IPOs from the PSU space however is making us do a rethink. Issues like Coal India Ltd and MOIL have been met with spectacular success. However, it remains to be seen whether such issues are likely to be exceptions. Or will they become the norm going forward?
To get an answer to the above question, we may have to dig a bit deeper. If one tries to
analyse IPOs in the recent past, one sees a definite trend emerging. The issues that have been successful are the ones that have come from the stable of the Government. Or to put it another way, issues of Government controlled companies have hit the bulls eye more often than their private counterparts.
And thereby perhaps hangs a tale. We believe the underlying motive of the owners of PSUs is vastly different from that of the private companies. For starters, most Government issues have been offer for sale. In other words, the money that has been raised has not gone into the company but has gone into the kitty of the Government. This is because companies like Coal India and MOIL are hardly in need of any cash. On the contrary, they are sitting on huge cash reserves.
The Government on the other hand wants to fill up its bloated budget deficit by the time the fiscal comes to an end. And thus, it wants to raise big money by selling stake in Government owned companies and raise it fast. Furthermore, since the IPO pipeline for the Government is huge, it wants to incentivize minority shareholders by pricing issues such that there is some money left on the table for them.
Nothing wrong with the move we guess. Such types of IPOs do ensure that the entire exercise is a win-win situation for all. If only private companies could also do such a thing. However, it looks unlikely that they would ever play ball. This is because unlike their Government counterparts, the money that these companies raise goes to the company itself. And the lesser the dilution there is for such a move; the better it is for promoter shareholding in the company.
Thus, with vastly different motives in play for Government and private sector IPOs, the money that they end up making for minority shareholders also differs a great deal. This is the reason we haven't given a blanket approval for IPOs. But we will certainly continue to look for situations where there is indeed a strong chance of some money being kept on the table for minority investors.