Sebi strives to cut costs for IPOs

Discussion paper on this has useful suggestions, say stakeholders; average expense for IPOs in 2014 over 7% of issue proceeds

The average expense for the five Initial Public Offers (IPOs) of stock in 2014 was 7.1 per cent of the issue proceeds.

Unsurprising, then, that the word ‘cost’ was used seven times in a discussion paper on Rrevisiting the capital raising process’, floated by the market regulator, Securities and Exchange Board of India (Sebi).

The total issue expense was the highest for Shemaroo Entertainment at nearly 10 per cent. That for Sharda Cropchem was the least at 5.5 per cent, shows the final offer document filed by these companies. In other words, Shemaroo had to spend around Rs 12 crore of the Rs 1,200 crore to come to the market. A total of Rs 85 crore was spent by the five issuers.

Many believe high cost is one irritant for companies wanting to make an IPO. Taking cognizance, Sebi, in the proposed revamp for public issues, plans to bring down costs, along with other goals such as faster listing and streamlining the processes.

“While the cost of raising capital through public issues in Indian securities market is comparable with that in overseas jurisdictions, there is scope for reducing this further,” Sebi says in the discussion paper.

Some of the steps it has spoken of are a new distribution system called e-IPOs, an abridged offer document and reducing the dependence on cheque payments. Sebi’s move to bring down costs came at a time when the country’s IPO market was going through one of its worst lulls. The amount raised through IPOs last year was the lowest in more than a decade.

“Cost is definitely one aspect an issuer looks at while considering an IPO. Bringing these down will definitely help in decision making,” said Mahavir Lunawat, group managing director, Pantomath Advisory Services Group.

Market participants believe unlisted companies are getting lured towards other mediums of capital raising where cost are lower, such as private equity.

Eliminating printing of IPO application forms by encouraging investors to apply online is one proposal made by Sebi. Terming this ‘e-IPOs’, it would involve applying online through the web portal of a broker.

Girish Nadkarni, managing director, Motilal Oswal Investment Banking, believes an e-IPO will help. “Physical distribution of forms and prospectus across the country involves a lot of costs,” he said.

The cost of marketing, printing and distribution is the second-most after investment banking fees in an IPO, say bankers.

Sebi is also considering shortening the IPO application form and doing away the need of having an abridged prospectus with every form. “A lot of information can be fed to investors online or through stock exchange websites. If the disclosure requirements are rationalised, that will help save costs, too,” said Lunawat.

Investment bankers say the costs as a percentage of overall issue proceeds are typically high for small-sized offerings. “Most of the costs are fixed, irrespective of the issue size. This puts small issuers in a disadvantageous situation. They still find listing attractive, as it adds a lot of value in the long run,” said an investment banker, who didn’t want to be named.