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!!





Wednesday, May 16, 2012

Disa India Ltd - AGM Notes

Hello to all. As i write this, the Sensex has ended about 300 points down. Good old days are coming back again! :-) Just kidding!
I attended the AGM of Disa India Ltd on 9th May, 2012 in Bangalore. This is the link to my previous article on the company, which also contains links to some more previous articles on the company!
I would rate the company's management very very highly. The overall body language was positive. The management is always open to answering all reasonable questions, without making any tall claims, etc. No-nonsense and to-the-point. My kinda people!


Some notes about the AGM...

On the demand side, the company is still seeing robust demand. Some slowdown was seen in the quarter ended December 2011, but since January 2012, enquiries and orders have improved substantially.

Wheelabrator now contributes about 25% of the sales. Good visibility being seen in this segment also. 2 new machines are planned to be introduced in the near future. Mr.Carmichael, who was VP of the Wheelabrator business worldwide has been inducted in Disa India's Board.

Latest order book is around Rs.85 cr.

Growth seen on both fronts; new foundries as well as automation of existing manual foundries. On sustainability of demand, the management gave an interesting statistic; out of about 5000 foundries in India, 4000 are fully manual.

On transfer of shares from escrow account, the management clarified that although the case is still going on, the company gave an undertaking to abide by the Supreme Court’s decision, whatever it might be. Hence, the Supreme Court gave them the permission to transfer the shares. The promoters now officially hold 86.5%.

Delisting: no comments since decision has to be taken by promoters, not by the Indian board of directors

Cheers and happy investing


Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Tuesday, May 1, 2012

Falcon Tyres - Hats off, promoters!

Falcon Tyres is a BSE listed Pawan Ruia group company. (These are not the same as the Ruias of Essar, but they are just as deadly!)
The Pawan Ruia Group has two companies (among others), Falcon Tyres and Dunlop. Now, the Ruias have never really been very minority shareholder friendly. There is no need to debate that.

Recently, they did something really blatant in Dunlop. There was quite some hue and cry about it, which I am sure, will be forgotten soon.

However, what is more interesting, is what they are doing in Falcon Tyres. This is much more discreet than what they did in Dunlop :-)

Lets start from the beginning, for the simple reason that one should not start from the end..(Ya ok, bad joke)

Currently, the promoters hold 81.07% of Falcon Tyres. The promoters have also been generous enough to give large amount of interest-free unsecured loans to Falcon. As per the 2011 Annual Report, the amount of these loans was Rs.132 cr. Nice! Anybody willing to give me money, interest-free, please?

Now comes this announcement. Please do read it once. This announcement entails the following:
1) The loans given by the promoters seem to have been transferred to 'unrelated parties'.
2) These 'unrelated parties' are being allotted equity shares pursuant to conversion of the unsecured loans into equity shares, at a price calculated as per SEBI guidelines. This will lead lead to massive dilution.
3) Please note that the entire loan (which is now Rs.144 cr it seems) has been transferred by the promoter to three different parties. Allotment will take place to three parties. Not one, or two, but three parties.

This is what the shareholding before and after this allotment would look like..











So what should one make out of this entire event? Some things come to mind..

1) Why did the promoter transfer the loans to outside parties? Why didn't he allot shares to himself on conversion? Well, because that would lead to minimum public shareholding as well as open offer problems, since the promoters already hold 81%.
2) Are these 'outside parties' really 'outside' parties? Or is there some understanding between them and the promoters? Well, we will never know!
3) Why three outside parties? Well, because, with three parties, this massive dilution of shares can be divided among them, so that any one of them does not acquire more than 25%, thereby eliminating the necessity to do a compulsory open offer. This would not have been possible with just one or two parties. Smart!
4) So, anything else special about it? Well, of course! Please refer to the post allotment shareholding above. The promoters plus these three allottees would together hold 91.67% of the share capital. So basically, with this allotment, the promoter satisfies the 75% shareholding criteria (his shareholding is 81% presently, which comes down). He can relax about that. Plus, at any point of time, if he wishes to delist the company, all he has to do is talk with just these three parties. If they tender, his holding goes above 90% and he can delist! Now thats sooo convenient. No minority shareholders ka zhigzhig. What would be even more convenient is if these three parties have been allotted the shares with a tacit understanding that they will tender the shares at a later date for delisting. Super smart! But we will never know if that is the case.

This entire methodology is smartly designed in a way which gives maximum flexibility as well as control to the promoters. Their shareholding comes below 75%, so there is no problem on that front. Also, they can pretty well delist the company whenever they want, without being blackmailed by minority shareholders for giving a higher exit price. A disproportionately small group of shareholders would decide the fate of the entire minority shareholders. (Are the MNCs listening? This is a great alternative to being fair to shareholders!) :-)

Did you think this entire methodology is revolutionary? Its something new? Well, its not!!

Another company of another Ruia Group, India Securities, recently delisted from the Indian markets using this very same methodology, at a really low price.

Will Falcon tread down the same path? Well, we cant say it will happen, until it happens!

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!