Great Indian IPO Trick

I loved T.R. Ramaswami’s article in LiveMint so much that I had to post it in ENagar.

Who is the greatest magician? David Copperfield? P.C. Sorcar? There is a new extremely talented magician. In specific, he can (to use a term favored by magicians) “vanish” the law and transform any amount of money as many times as necessary in four months. However, his little (or not-so-little) tricks are as susceptible to deconstruction as those of any other magician’s and can be broken down into sleight of hand (also called prestidigitation orléger de main), misdirection, deception, collusion with a member of the audience, apparatus with secret mechanisms, mirrors, and other tried and tested trickery. Subject to the caveat of a statutory warning (“This trick can be performed only by him or those who share the same surname and should not be attempted by others”). Here’s how to do it:
Step 1: Float a shell company (i.e., a company that exists on paper, is a legal entity but does not have any economic activity). Name the shell company XYZ Ltd. Paid-up capital Rs1 lakh only.
Step 2: Increase the share capital of the shell company from Rs1 lakh to Rs1,000 crore by passing a resolution.
Step 3: Another shell company of the magician, say ABC Ltd, and a listed associate, say PQR Ltd, each invest in the shell company XYZ Ltd. These are nothing but book entries, the financial equivalent of magic.
Step 4: Immediately apply to the court for the merger of XYZ with DEF. The reason for the merger as stated in the application “XYZ has put in considerable efforts in acquiring necessary technical and manpower skills, which are ancillary to the business of DEF which can take benefits of this specialized skill sets and technology available with XYZ to undertake mega power projects and implement them more efficiently and successfully.” This “expertise” has been acquired by the shell company within days of increasing the capital.
The real reason is to comply with regulatory guidelines supposedly designed to prevent fraudulent transactions, but which actually aid and abet them. This relates to recognizing the minimum capital brought in before a public issue as promoters’ contribution. The promoters’ contribution would have to be at many times the face value otherwise. A merger sanctioned by the court qualifies as promoter capital, which it would not have otherwise. The unsuspecting court allows the merger, since both the companies are private companies not knowing that there is no expertise involved except that of manipulating the market for a public offering of shares at a premium of 45 times within a period of four months. The merger is sanctioned.
Step 5: Millions of shares of PQR are allotted to the owners of the shell company, XYZ, and ABC called a Project. (The word ‘project’ could only refer to multiplying money many times in four months.)
Step 6: Engage top-notch intermediaries for a gigantic public issue. Select rumors and stock market manipulation push up the price of all shares in the same industry (there are not many) to dizzy heights to justify the premium and ensure subscription. Advertise aggressively and hijack the caller ring tone of captive telecom customers without their consent to play the advertisement.
Step 7: Engage a top-notch lawyer to obtain a blanket gag order from the highest court against various  petitions  in  various  courts.
Step 8: Get the issue subscribed and have it quoted at a further premium to the initial public offering (IPO) price in grey market operations.
Step 9: Say “Oops” and make pious statements of long-term returns when the market crashes.
And all this is within the “law”!!
Where are all the investor protector forums and champions?

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8 thoughts on “Great Indian IPO Trick

  1. Wonderful article, indeed. I now understand the basic funda…I wonder, though, how the MFs and FIIs fall for this, if it is in fact shell companies that are fronts for sucking up public money…

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  2. ipos in india r driven by peer pressure….
    if an ipo is oversubscribed, then everybody will apply for it… and making it even more oversubscribed….
    and that is how the oversubscription works… everybody knows that ipo is a hot potato and the best price will be on the day of listing and in a week or 2 the stock price will bottom out.. but in a greater fool theory people r charmed to it, in the hope that they would have squared off their deals long before the crisis….
    some succeed some don’t

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  3. doc not all the companies and ipos r bad

    some like maruti and canara bk were great for investors
    the fact is that many promoters are real greedy and it is quite easy for the promoter fii and fis and their chamchas in grey mkts to fix good to look at premium

    lastly it isnt just reliance pwr, lots of promoters have used the formula
    buliding stocks and lots other cos

    the fact that the sebi and the fm sleeps is what is scary (rel energy shareholders objections were squarely rejected)
    add to it the kind of documentary evidence that is expected for investing for the aam admi, visa vis the pn investors is shocking.
    if mkts in india have to develop very aam admi the barber the vendor the farmer should have a pf or mf investment and with the documentation req its just nt possible

    nyways ada has done the smart thing for the people who took the risk of holding on to their shares of rpower and showing their faith- something he should be commended about even if it is due to ulterior motives, as he had no legal obligation to declare a bonus

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  4. ipo mkts are like the buy buy sell sell pic u posted
    i was also about to post it but refrain as u did

    in relative terms our markets r good chinese ipo mkts are pure gambling

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