Ashok Kumar
A few months ago, an ex-student of mine, who is now engaged as an equity research analyst with a prominent broking house, cautiously asked me whether I ever felt that I was far too dismissive while evaluating initial public offerings (
IPOs), more particularly the smaller ones.
He cited the example of a company whose IPO we had rated as D (poor) but whose stock price had risen by 50 per cent post-listing. My response then was, let us revisit the stock price of this company 45 days down the line.
Sure enough, the stock quoted 60 per cent below its IPO price by the end of the stipulated period and my student had learnt his lesson well in the best way, as I often repeat at my guest lectures - by actually losing money.
I am certain, like my student, many of you have often wondered about the phenomenon of a clearly under-par company with a ridiculous price-tag getting full subscription and thereafter quoting (albeit temporarily) at an even more ridiculously high price, post-listing.
Given the lack of fundamentals of most of these companies, clearly, there is more to these bumper listings than meets the eye. Based on anecdotal evidence, market regulator Securities and Exchange Board of India (
Sebi) is either oblivious or disinterested in this phenomenon and resultantly the rapacious machinations of criminals, euphemistically and rather gently, called 'operators' continue uninterrupted.
While the onus of busting this 'drop by drop' multi-crore small IPO scam and proving the modus operandi of the operators and promoters must rest at Sebi's door, let us now turn the spotlight on how it must be perpetrated.
Let us assume a scenario where a company, RXL's financials are so obviously weak that banks will no longer be willing to part with good money to recover their bad money.
In such a scenario, one of the several small and unknown investment bankers approach the company and offers its management an IPO plan, which looks to be a win-win scenario for both parties concerned.
Let us again assume, for arguments sake, that Rs 50 per share is the mutually agreed fair value of the company arrived at by the two parties.
The investment banker then makes a Don Corleone-like offer that 'cannot be refused', of taking the IPO through at a price of Rs 100 per share with the 'support' of their guaranteed investors and operators.
The trick is to manage subscriptions from guaranteed investors and operators in the form of cheques at Rs 100 per share before issuing a guaranteed cash-back of around Rs 30.
This reduces the effective investment cost for these guaranteed investors and operators to Rs 70 per share.
Secure in their knowledge that the fundamentals and pricing of these small IPOs are so poor that informed retail and high net- wroth individual (HNI) investors will keep away, the shares thus get distributed to the guaranteed investors and operators thus choking whatever little free-float there otherwise may have been post-listing.
In the week ahead, we shall turn the spotlight on the manner in which these operators and promoters relieve themselves on the heads of gullible and greedy retail investors.
(Ashok Kumar is promoter theIPOguru. com and director, Lotus Knowlwealth) Courtesy: Mail Today 
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