The Securities and Exchange Board of India (Sebi) has asked the main investment bankers for the initial public offering (IPO) by Coal India Ltd (CIL) to cut the hype while promoting the largest ever such issue in India, according to two senior officials at separate book running lead managers.
The two investment bankers said the capital markets regulator was uncomfortable with the months of excitement surrounding the Rs
15,000 crore issue, especially since similar large share sales in the past have seen hard selling by investment bankers, initial investor frenzy, followed by tumbling share prices.
“We (bankers) have been specifically told by Sebi not to talk about the issue. If at all we do, we have to stick strictly to the prospectus,” one of the investment bankers said. He requested anonymity as he is not allowed to talk on regulatory issues.
A senior Sebi official referred calls from Mint to Usha Narayanan, executive director of Sebi, who handles public issues. Narayanan could not be reached for comment as she is out of the country.
In a conference organized by the Association of Merchant Bankers of India on 24 September, Narayanan had warned bankers against planting news articles and making forward-looking statements in corporate advertisements by companies going for IPOs. “We will not tolerate this forever. We are looking into it and preparing a (discussion) paper,” she had said then.
The CIL share sale is scheduled to open for subscriptions on Monday.
CIL and the bankers to the IPO have already taken note of some of these concerns in the red herring prospectus they have filed with the regulator, explicitly mentioning media hype as a risk factor that investors need to be wary of.
“There has been press coverage about us and this offer... We wish to emphasise to potential investors that we do not accept any responsibility for the accuracy or completeness of such press articles,” reads risk factor No. 70.
In the final red herring prospectus, the following disclaimer has also been added: “In making your decision as to whether to purchase our equity shares, you should rely only on financial, operational and other information contained in the red herring prospectus. The information about the company in the press coverage may not be true of the company and any decision to invest in the equity shares based on such information in the press coverage may not be based on correct information,” the prospectus said.
The informal regulatory action as well as the explicit listing of media hype as a risk factor have raised several issues about the quality of information available to investors and who should be responsible for it.
Prithvi Haldea, chairman and managing director, Prime Database Ltd, a primary market tracker, said, “Sebi sees futuristic statements as hype. At times, the issuer is much bigger than the merchant banker and the merchant banker is not in a position to control what is being said in various forums by different people. But Sebi doesn’t have any direct connectivity with the issuer. They operate through the banker. More often, the problem is at the issuer’s end.”
CIL director (finance) A.K. Sinha said, “The document has been drafted by our legal counsel in consultation with our book running lead managers. We have not received any written communication from Sebi.”
B.Narasimhan, vice-president, Karvy Computershare Pvt. Ltd, a share registrar not involved in the IPO, said the disclaimer would have been necessary because the sheer number of newspaper articles and the amount of air time the CIL issue has garnered. “It’s difficult for anyone to monitor and issue denials. So, they seem to have incorporated this as a risk factor,” he said.
According to Haldea, though merchant bankers had been pulled up in the past, there has not been any extreme action.
The ban on futuristic statements dates back to the days of the Controller of Capital Issues, the authority that cleared and priced IPOs before the 1991 economic reforms, when the entire issue was sold to retail investors. Today, there are institutional players taking up 50% of any public issue. Since the prospectus has only details about past performance, the investor often does not get a clear picture of the future, for which he is paying the price.
“The company and bankers have many ways of sharing futuristic information to select investors. This creates asymmetry of information. The law needs to be reconsidered. The prospectus should have a projection of what the company will look like in next three-five years” Haldea added.