SEBI strives to cut costs for IPOs

The aver­age expense for the five Ini­tial Pub­lic Offers (IPOs) of stock in 2014 was 7.1 per cent of the issue proceeds.

Unsur­pris­ing, then, that the word ‘cost’ was used sev­en times in a dis­cus­sion paper on Rre­vis­it­ing the cap­i­tal rais­ing process’, float­ed by the mar­ket reg­u­la­tor, Secu­ri­ties and Exchange Board of India (Sebi).

The total issue expense was the high­est for She­ma­roo Enter­tain­ment at near­ly 10 per cent. That for Shar­da Cropchem was the least at 5.5 per cent, shows the final offer doc­u­ment filed by these com­pa­nies. In oth­er words, She­ma­roo had to spend around Rs 12 crore of the Rs 1,200 crore to come to the mar­ket. A total of Rs 85 crore was spent by the five issuers.

Many believe high cost is one irri­tant for com­pa­nies want­i­ng to make an IPO. Tak­ing cog­nizance, Sebi, in the pro­posed revamp for pub­lic issues, plans to bring down costs, along with oth­er goals such as faster list­ing and stream­lin­ing the processes.

“While the cost of rais­ing cap­i­tal through pub­lic issues in Indi­an secu­ri­ties mar­ket is com­pa­ra­ble with that in over­seas juris­dic­tions, there is scope for reduc­ing this fur­ther,” Sebisays in the dis­cus­sion paper.

Some of the steps it has spo­ken of are a new dis­tri­b­u­tion sys­tem called e‑IPOs, an abridged offer doc­u­ment and reduc­ing the depen­dence on cheque pay­ments. Sebi’s move to bring down costs came at a time when the country’s IPO mar­ket was going through one of its worst lulls. The amount raised through IPOs last year was the low­est in more than a decade.

“Cost is def­i­nite­ly one aspect an issuer looks at while con­sid­er­ing an IPO. Bring­ing these down will def­i­nite­ly help in deci­sion mak­ing,” said Mahavir Lunawat, group man­ag­ing direc­tor, Pan­tomath Advi­so­ry Ser­vices Group.

Mar­ket par­tic­i­pants believe unlist­ed com­pa­nies are get­ting lured towards oth­er medi­ums of cap­i­tal rais­ing where cost are low­er, such as pri­vate equity.

Elim­i­nat­ing print­ing of IPO appli­ca­tion forms by encour­ag­ing investors to apply online is one pro­pos­al made by Sebi. Terming this ‘e‑IPOs’, it would involve apply­ing online through the web por­tal of a broker.

Girish Nad­karni, man­ag­ing direc­tor, Moti­lal Osw­al Invest­ment Bank­ing, believes an e‑IPO will help. “Phys­i­cal dis­tri­b­u­tion of forms and prospec­tus across the coun­try involves a lot of costs,” he said.

The cost of mar­ket­ing, print­ing and dis­tri­b­u­tion is the sec­ond-most after invest­ment bank­ing fees in an IPO, say bankers.

Sebi is also con­sid­er­ing short­en­ing the IPO appli­ca­tion form and doing away the need of hav­ing an abridged prospec­tus with every form. “A lot of infor­ma­tion can be fed to investors online or through stock exchange web­sites. If the dis­clo­sure require­ments are ratio­nalised, that will help save costs, too,” said Lunawat.

Invest­ment bankers say the costs as a per­cent­age of over­all issue pro­ceeds are typ­i­cal­ly high for small-sized offer­ings. “Most of the costs are fixed, irre­spec­tive of the issue size. This puts small issuers in a dis­ad­van­ta­geous sit­u­a­tion. They still find list­ing attrac­tive, as it adds a lot of val­ue in the long run,” said an invest­ment banker, who didn’t want to be named.

Cour­tesy: Busi­ness Standard