| Move to protect firms from litigation by investors.
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| Companies that want to raise funds from the capital market through initial public offers (IPOs) are rushing for risk cover to protect themselves from litigation by investors.
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| Tata Consultancy Services (TCS) and National Thermal Power Corporation (NTPC) had taken risk cover before going public. TCS, which raised about $11 billion, is understood to have purchased a risk cover known as a transactional insurance policy for about $90-130 million. NTPC, being a government-owned entity, has taken a more conservative risk cover.
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| A number of companies were seeking transactional insurance cover before going in for IPOs, said Praveen Vashishta, CEO and managing director of Howden India, an insurance broking entity.
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| The size of the risk policy depended on the size of the issue, the potential market capitalisation of the company and the country where the issue was raised, he added.
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| “When a company goes for an IPO, it has to declare a lot of information about itself. Based on this, investors make their investment decision. If the information is proved wrong and results in a loss for investors, they can take the company to court,” Vashishta said.
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| With at least 50 per cent of the issue size being earmarked for qualified institutional buyers (QIBs) and foreign institutional investors, the possibility of litigations can not be ruled out.
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| Shareholders of China Telecom took the company to court questioning its accounting practices after the company came out with an IPO. Investors have received nearly $16.3 million from companies that made misleading or false statements in their letter of offer in the US.
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| With FIIs participating in domestic IPOs in a big way, it would not be long before they took companies to court, David Howden, chief executive of the London-based Hyperion Insurance Group, said. Hyperion was instrumental in TCS purchasing a transactional risk cover for its offer. |
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