Mumbai: The initial public offering (IPO) season is in full bloom. Across financial newspapers and television channels, familiar statistics flash by—Coal India Ltd’s $3.4 billion (around Rs15,165 crore today) new share sale, the record Rs57,536 crore raised by Indian companies in the equity markets this year, the new closing high of the Sensex at 21,004 and so on.
Here’s one which you may not have read so far: 360m. If the 12,000 draft red-herring prospectuses that Coal India printed were vertically stacked, the pile would be five times the height of Qutub Minar.
The state-owned company is just one among the 109 that have filed documents to raise money this year.
In the Mumbai suburb of Vasai, Western Press Pvt. Ltd is working round the clock. It’s printing prospectuses and retail subscription forms, reminding chief executive officer Pratul Dalal of the heyday of 2007 when there was a similar frenzied rush of IPOs with many public sector unit divestments.
If the IPO documents of all 109 are piled up, at an average of 5,000 copies per company and an average 1.8cm thickness, it would create a stack some 9.8km high, about a kilometre taller than Mount Everest.
But that’s only one part of the story. How many people actually read these documents and what part do they play in helping them reach an investment decision?
Only about 1%, or say 50 people, on an average actually read them, said three investment bankers interviewed for this story.
Even that number might be exaggerated, said a mutual fund manager on condition of anonymity. Nobody wants to wade through 400 or so pages of legalese that seem to obfuscate rather than clarify and hide rather than disclose.
In his preface to a US Securities and Exchange Commission (SEC) handbook, legendary investor Warren Buffett wrote: “For more than 40 years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said.”
Institutional investors and high networth individuals (HNIs), who can subscribe up to two-thirds of a new share sale, rely on analysts to do their homework for them. For smaller issues, there are hardly three or four brokerages, which put out reports.
Institutional investors depend on roadshows, where investment bankers and company promoters make presentations and answer questions.
“Why would I be crazy enough to read the document? Up to 80% of the risk factors mentioned are irrelevant anyway. Roadshows offer the best opportunity to grill the company and decide whether to invest or not,” said the mutual fund manager cited above.
HNIs have their wealth managers and analysts. Retail investors, most of whom are not equipped to read such technical matter, get the short shrift. They end up depending on what the media says about IPOs.
“It’s too cumbersome to read. I depend on what people say,” says Vipin Pandey, 30, a Noida-based investor. As for the abridged prospectus, “it gives a new meaning to the phrase small print”, Pandey adds.
Putting together a prospectus is no easy task. It takes up to eight weeks to draft one by a team of around 15 people, said one of the investment bankers cited above. It usually includes the chief financial officer of the company that wants to list and three-four mid-level investment bankers, apart from the team of lawyers who do the actual drafting.
“Any omission in the prospectus results in liability and we want to avoid that,” said the second of the investment bankers quoted above. “With all those caveats, the language starts becoming Greenspan-ish,”
The reference to Alan Greenspan seems apt. Known for making obscure monetary policy statements, the former chairman of the US Federal Reserve once told reporters: “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
Bankers say they’re just following the legal requirements as set out by market regulator Securities and Exchange Board of India (Sebi) while drafting the prospectus.
The regulator has laid out the norms for offer documents in the Disclosure and Investor Protection Guidelines, an exhaustive document that even specifies the thickness of the prospectus cover and the colours that may be used. But there is no guidance on style or clarity.
SEC has tried to solve this problem by issuing a plain English handbook for underwriters that offers guidelines on clear writing with examples.
However, the fear of liability is the key concern for bankers and companies. In other words, the guidelines notwithstanding, US documents too are known to contain 89-word sentences with a dozen numbers.
Plain english is a desirable thing, but it still may not help, said Jayanth R. Varma, a professor at the Indian Institute of Management, Ahmedabad—a former Sebi executive director—who has read hundreds of such prospectuses.
“Even with all the plain English, a prospectus is still going to be a difficult read,” he said. “At the end of the day, the disclosure process relies on analysts and professionals to process this information and present it in a distilled form to investors.”