Big share issues need close scrutiny

Unless there is yet another twist in the tale, it will finally happen. It is real estate giant DLF’s mega-IPO is what we are talking about here. While the pricing details are not yet known, one would reckon that it could be in the vicinity of Rs 550 per share of Rs 2 face-value. While reams have already been written about how the promoter’s wealth will be multiplied after the share issue, spare a thought for investors.

If one were to undertake a preliminary SWOT (strengths, weaknesses, opportunities, threats) snapshot, clearly the biggest plus the company enjoys is its huge land holdings ( the market no longer likes the term land bank ), most of which was acquired during times when real estate rates were benign.

On the flip side, its market capitalization will be close to three times that of Unitech, which itself has not had very happy days at the bourses of late. And therein lies the concern for retail investors. Real estate stocks have only flattered to deceive at the bourses since last year’s sharp sell-off. Clearly then, its not the hottest segment at the moment.

Moreover, the memory of minority shareholders (who were part of DLF's earlier avatar before it had de-listed) filing a complaint with the market regulator that they were not informed about a debenture offering by the company raises corporate governance-related concerns. Yet, as always, it would be best to defer a final judgement till the Red Herring Prospectus is put out.

Another large company that has announced equity dilution plans is ICICI Bank and the news was immediately followed by a dunking of its share-price. While the bank’s management merits praise for ‘managing’ the smooth transition from its erstwhile parent, the beleaguered ICICI ( hit by non-performing assets), the fact remains that the proposed dilution has not been seen as particularly good news at the bourses.

Considering that ICICI Bank had only recently made the largest follow-on public issue in terms of aggregate funds collected, its penchant to revisit the market at such short frequencies is a source of concern.

Compare this with its peer, HDFC Bank, which continues to remain on the top of the mindshare of decision makers in the market primarily for its ability to quietly and efficiently roll on with minimum fuss. As regards an in-depth comparison between the two banks on pure financial parameters, let us defer it to a date closer to the proposed equity dilution by ICICI Bank.

Now, the stage is set for the routine question : Will these mega public issues suck out liquidity from the secondary market? Pre-empting that question, the response is: Liquidity is unlikely to be an issue, but valuations could be, both in the secondary as well as the primary market.

Some things never change, do they?

The author heads investment advisory firm Lotus Knowealthand can be contacted at ceolotus@hotmail.com