Monday, May 21, 2012

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!!





30 comments:

Anonymous said...

Sir,
Really an educative post !Till date I was unkown to all these facts. Thanks for the update.
Btw i tried to LIKE the SEBI page on FB ,but there is no such page :P

Anil Kumar Tulsiram said...

Great post, hard to believe US have such a rule on independent directors.

Neeraj Marathe said...

Hi Anon,
We should take up the issue with SEBI..that they are not on facebook! :-)
cheers!
Neeraj

Neeraj Marathe said...

O yes Anil,
Pretty hard to believe..i was very surprised too, since i do not know much about the US market, nor do i follow it..
cheers!
Neeraj

Rohit Chauhan said...

Hi neeraj
SEC follows the principle of disclosure...in effect they dont prescribe much as long as the company discloses everything

so the basic philosophy is different ...more of pure capitalism and not the attitude of 'Government' knows best. that is more in the indian context

i am not saying which one is better, maybe in indian context it is better to have these rules as we do not have as many informed investors

rgds
rohit

Neeraj Marathe said...

Makes sense..
Thnx Rohit..good to get a comment from someone like you, who is quite into US stocks..
cheers!
Neeraj

Austin Victoria said...

Great article Neeraj!

So the market watchdog (Sebi) is doing a great job though being such a pain sometimes lol

Look at Facebook IPO, sadly following the trend of Google when it went public. Looks like the common man is trampled by Institutional Investors/Merchant bankers (closed at $31 today)

Neeraj Marathe said...

Thnx Austin. And ya, in some cases, sebi is a pain for sure.
I am quite surpriseed to see Facebook sizzle out so fast. I thought that the frenzy would last for some time..
Cheers!
Neeraj

Vikas said...

Hi Neeraj,
Really an EYE-OPENER.
When I say this I sound too pessimistic but unfortunately I am realistic.

We are really good (blind) followers of west. I doubt for how many years both SEBI & RBI can handle this onslaught by big coporates.

Its a matter for few years, you will see SEBI falling in the same line as US market authorities.
And I will not at all wonder to see (say for Ex) Deepak Parekh / Chanda Kocher / Kamat ( Private bank past chiefs)as RBI chief in future.

Its bound to happen. When is the only question?
And once it happens, may GOD help us!

Regards,
Vikas

Neeraj Marathe said...

Well I sure hope it doesnt happen that way Vikas..
cheers!
Neeraj

Neeraj Marathe said...

Well I sure hope it doesnt happen that way Vikas..
cheers!
Neeraj

Mahesh said...

Nice post Neeraj!

Neeraj Marathe said...

Thanks Mahesh!
Cheers!
Neeraj

Anonymous said...

Sir,
Sure we must ask SEBI to join FB and d same applies to U also :P
Moreover,
The unknown advantage of a successful IPO---when GOOGLE went public there was a wave of divorces. When Cisco went public there was a wave of divorces,but as we see that FB IPO isnt that successful we can expect Zuckerberg going for a honeymoon ;)
(bcz successful IPO=Divorce so Unsuccessful IPO= Marraiges ):)

Neeraj Marathe said...

hahaha..good one anon..
cheers!
Neeraj

Anonymous said...

Thanks Sir

Cheers!!!

Neeraj Marathe said...

Umm..most welcome Anon..
cheers!
Neeraj

Alok Katre said...

Good one Nirya. Quite strange to see some of the rules.
I will also add one point -
There has been a lot of clamour re pricing. I would beg to differ a bit on that front - that MS chose to change its numbers during the investor education phase ( which precedes the IPO) and bankers misled buyers about demand is clearly a financial crime.
But everyone today is saying the pricing was wrong - well if it was wrong why the hell did you bid for the shares in the first place. There is no point blaming analysts and bankers for that. Probably just a poor short term oriented merchant banking.

Anonymous said...

Neeraj Sir,
Why don't you come up with a write up (full of pun and sarcasm) on hike in petrol prices we would enjoy reading it :)
(i know it is no where related to the topic you write, but still )

Cheers to SM!!!

Neeraj Marathe said...

Hi Alok,
Well i think that all the fuss about the pricing is going on NOW, coz the stock price has dropped..if the price had sustained at higher levels, people would have been pretty ok with the pricing and valuation! :-)
cheers!
Neeraj

Neeraj Marathe said...

Hehe..ya anon..that would be an interesting idea..but usually i dont write much on stuff not strictly related to investing..
cheers!
Neeraj

Anonymous said...

Neeraj Sir

Then relate it to investing but please do write one.
(its PUBLIC DEMAND ) :P

Cheers !!!
Happy Writing ;)

Neeraj Marathe said...

Lol..it would certainly be nice to know who this 'public' (that means you!) is, Anonymous!
Cheers!
Neeraj

Anonymous said...

Sir,
Silence speaks more than words, so let my name be silent over here.Till date I have been Anonymous, but from next post I will surely have my name as well :)

Cheers to SM!!!
Happy Writing :)

Neeraj Marathe said...

Hmm..ok!
Neeraj

Sachin said...

You think SEBI is good. But I can show you many instances where SEBI is pathetic and SEC is very very good. Just one example for starter:
http://articles.economictimes.indiatimes.com/2012-05-22/news/31814497_1_gupta-and-rajaratnam-insider-trading-trial-gary-naftalis

Rajat Gupta is on trail just for leaking information to his friend Rajaratnam (Galleon Fund) who is convicted and in prison for 11 years fir insider trading.
And compare this SEC action with our GREAT SEBI action taken against Ambani's (both). Anil's case of RNRL and Mukesh's case of RPL insider trading.
They are openly misusing "Consent Orders" doing whatever they like and SEBI does nothing. Their are many many promoters who does all these wrong doings and get away with "Consent Orders".

Do you still think we still need to bow down before SEBI ?

Neeraj Marathe said...

Bow down before before SEBI?? Where did that come from?
Anyways, all of us have our opinions..
cheers!
Neeraj

Sachin said...

First of all I really like you articles.

May be I mistook your words, but they are copied below :-
these details will make one admire and respect SEBI. SEBI people, please take a bow.

For me "Sebi" or "Sebi peoples" are one and the same.
And yes ofcourse -- all of us have our opinions.

Neeraj Marathe said...

Sirji,
"SEBI people, please take a bow." does not mean one should bow down to SEBI!!
anyways,
Cheers!
Neeraj

Anonymous said...

Hey Neeraj Sir,

Look at this one, Mark Zuckerberg was on SAD Honeymoon while his FB stocks were getng f***d up.
http://smo.infinigraph.com/view?title=Mark+Zuckerberg+Is+Having+A+Very+Sad+Honeymoon+Due+To+Facebook's+Flop+On+The+Stock+Market&iframe=http://ebz.by/info/US/333818259

Cheers !!!