The Facebook IPO and why we are blessed to have SEBI!

I know I know..another article on the Facebook IPO..you must be already bored reading 'Facebook' in the title. But I am not going to talk about how an 8-year old company came out of nowhere to claim a market cap of more than that of HP and Starbucks combined. I am not going to talk about how the valuations of Facebook must have given a hard time to the supporters of the IPO, coz damn! They are so hard to be justified. I am not going to talk about the 'business model', neither am I going to talk about the addiction and disadvantages of social networking. I am sure you must have read alllll of these, many times over. I am instead, going to talk about something else. I would really like to talk about a few legal and procedural aspects of the IPO process in the US. (Statutory disclosure: I have never had, nor do I intend to have a Facebook account!)


I was reading bits and pieces about the Facebook IPO and I found some stuff that is really appalling. While I always hear a majority of Indian investors cursing the Government in general and SEBI in particular, these details will make one admire and respect SEBI. SEBI people, please take a bow. 
Check out these details..




Why did Facebook go public in the first place? All of us will agree that this is typically not a time for IPOs. People are cautious (read scared), overall valuations are not senseless and internet companies are not exactly the darlings of the market. Then, did you ever wonder why did Facebook decide to go for an IPO? The main reason for this were this and this. These are basically 'platforms which help investors connect'. They are not meant for everyone and only individuals having above $1 million networth can participate. In effect, these are nothing but stock exchanges, but not regulated as such. So private investors can login to the sites and put up their securities (which may not be listed) for sale, to be bought by other private investors. Due to these sites, there was a huge frenzy for buying-selling Facebook shares by the employees as well as early investors. This led to the number of shareholders going above 500. Now, it seems that as per US laws, if you have 500+ shareholders, you automatically become a 'public reporting company', which means you are bound by all reporting requirements of a listed company without any benefits of being listed. I think the Facebook people might have thought, might as well get listed! 
Well, basically these sites (platforms) created the required frenzy for Facebook shares helping them get obscene valuation. Its really good that such stuff is absolutely not allowed in India. Only authorised exchanges can provide a platform to trade in stocks..Thank you SEBI for that!!


Another aha moment I had was when I read about how the allotment of shares happens in an IPO in the US. In India, there are 3 defined classes of investors, with an allocated quota of shares for each, during an IPO. Thats quite fair for everyone, including the little guys. In the US, there is no such thing.. Effectively, the merchant bankers decide to whom the allotment is to be made. Damn, thats so unfair. This also leads to a different side-effect. Not everyone will be eligible to get the shares, helping merchant bankers boast about the IPO to gullible investor more! Its a simple thing; when you tell someone that you might not get something, he will want it even more! Thats good frenzy for you, just what the doctor ordered for an IPO. I feel that in India, the allotment process is comparatively much more fair..Thank you SEBI for that!


The third interesting point is that Mr.Zuckerberg will continue to own a bit above 55% voting shares. Under stock exchange rules in the US, a company where you have a controlled group that owns more than 50% of the outstanding rights of the company, you have certain exemptions that apply from corporate governance requirements that otherwise apply to other companies. So in this case there is no requirement to have an independent majority board, independent compensation committee, or an independent director nomination function. Now this is plain ridiculous. In fact, shouldnt it be just opposite? A company having a 'controlled group' should have more independent directors, not zero! But, thats what the law states and effectively allows a small group to control the entire company, no questions asked! In India, the provisions regarding independent directors are pretty stiff. (Although I wont comment on the independence of directors, at least the provisions are sound). Thank you SEBI for that!

For a person like me, who does not follow the US market, these few rules and provisions of the 'developed market' really took me by surprise. I had always found SEBI to be a really good regulator and this made my opinion stronger. There is no denying that loopholes exist and shortcomings are there, but I strongly believe that ours is an extremely proactive and fair regulator..

If I had a Facebook account, I would surely 'FRIEND' SEBI and 'LIKE' it a lot!

Cheers and happy investing!!