Mankind Pharma is going public with offer-for-sale (OFS) by its promoters. Public could bid in the narrow price range of Rs 1026 to Rs 1080 per share of rupee one each from 25th April to 27th April. Strictly speaking, this is not an Initial Public Offer (IPO) as OFS is as different from an IPO as cheese is from chalk. The proceeds of an IPO go into the coffers of the company whereas the proceeds of an OFS go into the coffers of the promoters, venture capitalists and private equity investors (all the three compendiously referred to as promoters hereinafter) who often want to ride piggyback on IPO.

In India, it is common for unlisted companies to go public through the IPO-cum-OFS route. Promoters ride piggyback on IPO as there is no differential pricing between shares offered by the company i.e. IPO and the ones offered by the promoters i.e. OFS. It is common knowledge that ever since the SEBI ushered in the 100 percent book building dispensation for IPOs, there has been aggressive pricing that has quite often resulted in listing losses for the public when they were looking for listing gains.

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Under the 100 percent book building route, even loss-making companies can make IPOs at mind boggling premium at the price discovered by the participants in the book building exercise. The rationale for such premium despite losses is the perception that the company has a bright future and indeed the public is investing in its future. Touché!

Mankind however is a profit-making company and the OFS isn’t going to dilute the EPS or earnings per share as there is going to be no fresh accretion to the share capital of the company.

In an IPO-cum-OFS, at least there is some justification for calling the combo exercise an IPO albeit in a facile way but when it is a pure OFS, as in the case of Mankind and earlier in the cases of Coal India and LIC disinvestments by the government, there is no justification whatsoever for such looseness of labelling the exercise. This is not just quibbling because the implications of the two are vastly different. A combo offer so to speak engenders the worst form of conflict of interest as the promoters have a vested interest in getting an exaggerated valuations from merchant bankers.

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A pure OFS dressed up as an IPO is something the market regulator SEBI should simply not countenance as when disinvestments take place they should be done under market conditions i.e., through the transparent screen-based trading that characterises our secondary market. To route them through the opaque primary market (price discovered by a tight clique of Qualified Institutional Buyers or QIBs who alone are allowed to participate in the book building exercise) does grave injustice to the public as while promoters exit at attractive prices, the allottees including the promoters are left to contend with the rough and tumble of the secondary market once they are left to fend for themselves there.

It is time for the SEBI and the Parliament to revisit OFS. It should always be a stand alone IPO without the water being muddied by the concomitant OFS. Once the shares are listed following IPO, the promoters must seek their fortunes in the bourses the hard and the transparent way. Necessarily, it has to be in trickles over a period of time and not through block deals which is another market distortion strangely countenanced by the SEBI. More on block deals in another article, suffice it to say herein that promoters should not be allowed to exit through primary market riddled with imperfections in valuations. Valuers are often lofty and extravagant in their predictions of the future outlook.

Coming back to the Mankind OFS, the price of Rs 1080 per share is approximately 33 times the company’s earnings per share (EPS) (which incidentally is approximately Rs 33 per share) which while being kosher and comparable in the Indian pharma sector, raises quite a few issues. First, Mankind is more a consumer product company and not a drug major in the same league as Sun Pharma and others. Second, EPS as the name suggest is earnings per share and isn’t a measure of return on investment (ROI).

Assuming a 100% payout, a dividend of Rs 33 on Rs 1080 is just a 3% ROI. It is true that investors in shares look more to capital gains than to dividend as their principal reward for risk-taking but the truth often glossed over is there is no one to guard the price line.

The SEBI dismantled the voluntary safety net regime in May 2018 which consisted in retail investors being bought back by the promoters up to 1000 shares per investors in case the market price plunged below the IPO price within six months of listing. Voluntary safety net begot a tepid response with no one wanting to place his head on the chopping block. One is apt to wonder if the SEBI should at least hold the promoters and merchant bankers to account by ushering in a mandatory safety net mechanism in case of OFS so that the pricing of shares in the primary market is more reasonable. Come to think of it, a Rs 1079 premium on every one-rupee share translates into an incredible and astonishing 1,07,900% premium!! Is it justified? Should the promoters be allowed to get away with such outrageous exit price untested in a transparent market?

Far too long, investors have been condemned to stew in their own juice----if you invest in equity, don’t expect any handholding. It is such a blasé attitude that is responsible for equating all equity investors as a monolithic block. Venture capitalists and retail investors cannot be treated as equals. So, if the powers that be do not want to disturb the status quo and allow primary market valuations to be continued to be applied for exit by promoters as well, the least they must do for the retail investors is to offer them a mandatory safety net. It will mean curtains to the aggressive IPO pricing that has been the bane of the primary capital market in India as promoters would tone down their vaulting ambitions in the grim knowledge that they may have to disgorge what they gorged on OFS.

— The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.

Read his previous articles here

(Edited by : C H Unnikrishnan)