Friday 30 March 2012

Rajiv Gandhi Equity Savings Scheme

Rajiv Gandhi Equity Savings Scheme

Came across in the website of Money Life an interesting article about:

The author has given a whole host of suggestions, most of which are valuable. One hopes that someone "up there" passes it on to Pranabda!

However, I disagree strongly with respect to a critical point mentioned in the article:

  • The author says: "SEBI should ban loss-making companies from coming out with Initial Public Offers (IPOs)".

I wonder why??? There are many instances, especially in a capital-starved, infrastructure-deficit country like ours, when new companies seek to come up with greenfield projects which involve long gestation periods. These projects are often highly capital-intensive. In fact, even in industries which are highly profitable, the initial years of a company are not profitable as they need to establish themselves in an already competitive market.

It is but natural that such compies which are loss-making in the initial years would not find too many easy sources of funds. One of the best ways of raising funds for such companies is to come up with an IPO. Obviously, the IPO is likely to be priced at a far more "reasonable" level when the company is incurring losses than when it becomes a cash cow. If anything, the promoter should be worried about diluting his stake at such low levels.

Hence, to ban an IPO of loss-making entities is to miss the woods for the trees. Equity investments, by nature, are risky. You can perhaps ban such loss-making companies from raising public deposits (which are unsecured). Don't ban them from raising equity capital. Let the retail investors participate in the development of the nation and reap the rewards in due course - albeit with a bit of risk in the process.

Regards,

N


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