Promoters help themselves with bonuses, pre-IPO

Pradeep Kumar Jain of Parsavnath is worth more than Rs 5,000 crore. Hardly surprising for an entrepreneur of a real-estate company that has just gone public, you may say. But, take a look at this, just before the company went public the company went in for not one but two bonus issues in six months.

This means the average acquisition cost per share (total cash paid for shares owned by the promoter divided by the number of shares held) for Mr Jain was a mere 10 paise compared to the IPO price of Rs 300.

Mr Jain and Parsvnath are not alone. Citigroup, which is one of the promoters of Suzlon, a company that went public last year, made a killing on listing. The acquisition cost for Citigroup was just about 22 paise a share. The Kashyaps, promoters of BL Kashyap and Sons, acquisition cost is hardly four paise. Dayanidhi Maran, the promoter of Sun TV has an average share at 26 paise. These are not just one-off or few examples.

While most issues these days occur at a premium, the average acquisition cost of Indian promoters is normally even less than the par value of shares. This was found to be true in every 9 out of 10 instances where the company went public. Some of the lowest acquisitions have been around 10-30 paise, the lowest being four paise. The cost of acquisition for some promoters actually ends up being negative because they have sold their shares at a hefty premium just before the issue.

The ET Intelligence Group studied all IPOs during the previous couple of years and found that in majority of the cases the promoters’ gains were more than 50 times or 5,000%. In a few instances though, the gains have been as high as 1,000 times or 1,00,000%. The best being a whopping gain of 17,124 times or 17,12,400%.

The modus operandi is simple. In a vast number of cases, the promoters issue themselves substantial bonus shares, just before approaching the market through the IPO route. Usually, the promoters purchase the first set of shares at par value and the remaining shares are issued as bonuses over the years, with a substantial bonus before the IPO.

The promoters of Sun TV, for instance, gave themselves 30 bonus shares for every one share held just before the IPO.

So while small investors might be thrilled with the fabulous returns that they get on listing of an IPO, it is the promoters who walk away with the real big bucks, thanks to a little financial smartness shown in the months preceding the issue.

ET Intelligence Group