SEBI PUTS PRE-IPO PE DEALS UNDER SCANNER

Private equity (PE) deals struck ahead of initial public offerings (IPO) have come under regulatory glare. The capital market regulator, SEBI, has taken a serious view on such pre-IPO deals, where companies have raised debt through issuance of ‘IPO convertible’ — a hybrid instrument which is debt in the garb of equity. Market sources said many pre-IPO deals struck last year had a now-familiar instrument called IPO convertibles. “It is nothing but debt, since companies do not freeze the pricing at the time of the deal and allow investors the freedom to buy equity at the IPO price at a later date when the company goes public,” said a Mumbai-based investment banker. Sebi is believed to have now asked companies that are going for IPOs to “freeze their pre-IPO pricing” and “to fix their IPO pricing independently”. Sources said the regulator is likely to announce measures to check pre-IPO deals involving IPO convertibles. Several attempts by ET to get a response from Sebi proved futile. An e-mail query did not elicit any reply. In 2007, private equity players had emerged as the most preferred investors for corporates, enabling them to raise a record $17 billion (around Rs 69,159 crore) during the year, according to Grant Thornton, a global financial and business advisor. The capital mobilised through PE deals last year was higher than the funds collected through IPOs, follow-on offers and qualified institutional placements (QIPs). A senior official with a PE firm said half of the PE deals struck in 2007, especially in certain sectors like real estate, involved IPO convertibles. “Any check introduced on IPO convertibles will bring in transparency in the primary market. Also, pre-IPO deals tend to influence the of investors who are unaware of the fact that the pre-IPO pricing is, in fact, not fixed,” said another investment banker. The government had earlier raised concerns about the increasing capital inflows affecting the value of rupee. It is being examined whether restriction on external commercial borrowing (ECB) are being side-stepped through such placements of quasi-equity instruments. The ECB rules suggest that the debt has to be fixed at Libor plus 2 percentage points. At the time of IPO, merchant bankers work out a valuation based on forward multiples of comparable peers. It also depends on the company’s business plan and its projections. There are industry-specific valuation methods: for instance, for real estate, net asset value (NAV) could be considered while for banks and financial companies, price to book value could be an indicator. Similarly, price-earnings multiple or EBIDTA-multiple could be used for the manufacturing sector. Last year, Indian companies sewed up 386 PE deals, mainly in real estate, infrastructure and financial services space. The IT & ITeS (IT enabled services) segments led the PE charts in terms of volumes, accounting for 66 deals. Some of the top deals last year included Temasek Holdings’ $1-billion investment in Bharti Infratel, another $1-billion investment by Deutsche Bank, Citigroup and other international investors in GMR Infrastructure and ICICI Venture Funds’ $800 million in Jaypee Infratech. - www.economictimes.com