SEBI and Zomato set to kill the Indian Start up industry

The IPO of Zomato which was issued at Rs 76 and got listed at Rs 125 has opened a Pandora’s box in the Indian stock markets.  This is not an information to rejoice. This is actually a serious threat to the Start up eco system and the investment markets in India because Zomato is a loss making company which has been allowed to go public at a premium against the known principles of raising money from the public for caproate activities.

We must remember that Zomato has a huge operating loss in its balance sheet and has so far shown a book value only based on the multiple private placements of the shares with investors at a premium, all of whom have conspired to now get public to invest their hard earned savings to replace the over valued acquisitions of the investors.

The Zomato shares have a face value of Rs 1 each and the issue price was determined on a book building process with the premium of Rs 75. The total issue was for 123.35 crore shares of which the fresh issue was 118 crore shares and Offer of sale from Info_Edge was about 5 crore shares.  The total money raised from public on account of this issue was Rs 9375 crores of which about Rs 9000 crores would come to the company and Rs 375 crores will go to Info edge. The reserves will be boosted by Rs 8880 crores crores will go into the credit of reserves.

The objective of the issue is stated as “Funding organic and inorganic growth initiatives” for which Rs 6750 crores would be invested and “General Corporate Purposes” for which Rs 1978 crores would be invested.

The Balance sheet shows Goodwill of Rs 1247 crores along with other intangible assets of Rs 207 crores. It has consistently made losses and over the last three years recorded losses of Rs 1010 crores, 2385 crores and Rs 816 crores in the last three years 2019, 2020 and 2021.

As an ex-Merchant Banker, the undersigned is intrigued by the financial information pertaining to this IPO.

The prospectus states that the Statutory auditor has not made any “Qualifications” on the report but the Company states

“the degree to which the financial information included in this Prospectus will provide meaningful information is entirely dependent on the reader’s level of familiarity with Indian accounting policies and practices, the Companies Act, Ind AS, and the SEBI ICDR Regulations”

The Risk factors stated include the following statements

” We expect to our costs to increase over time and our losses will continue…If we are unable to generate adequate growth we may continue to incur significant losses in the future”.

“Our funding requirements and the proposed deployment of net proceeds have not been appraised by any Bank or financial institution or any other independent agency and our management will have broad discretion over the use of the Net proceeds”.

“We have entered into and will continue to enter into related party transactions which may potentially involve conflicts of interest”.

“Certain of our corporate records and filings are not traceable or have discrepancies We cannot assure you that regulatory proceedings or actions will not be initiated against us in the future and we will not be subject to any penalty imposed by the competent regulatory authority in this regard”

The prospectus also mentions the risks associated with regulation with specific reference to PDPB 2019, ITA 2000 and the NPD Governance without indicating specific measures taken to mitigate the risks.

A detailed analysis of the prospectus and the reliability of the figures are beyond the scope of this article.

However we need to take a serious objection to the rules of SEBI which is now transferring the shares of this loss making company to the ordinary investors in the market. If SEBI was considered as an organization which takes care of the interests of the public investors, it is clear that it is not evident in the approval of this prospectus.

I would like knowledgeable investment consultants to take up this issue with the Ministry of Finance and ensure that the scheme of “Loss Making Start Up Companies” being allowed to make IPOs at a premium is stopped. It appears that many other loss making start ups may enter the market in the coming days and sooner or later when one of these companies go into liquidation there will be a “Start Up Bubble Burst” in India.

In the early 2000, when Sify bought Indiaworld.com at Rs 225 crores, it caused a dot com bubble burst and the correction of the sentiments   took several years. Earlier the Harshad Mehta bubble created a long term recession in the stock markets.

Now we can expect that SEBI-ZOMATO fiasco could result in another major crisis in the Indian investment scenario. It is clear that SEBI no longer can be relied upon as a trustee of the investor’s interests.

We have no problem if Start ups raise private equity until they turn profitable and there after raise public equity after they start generating profits.

We also have no problem if a loss making company raises public investment “At par” after proper disclosure.

But the current trend of trapping the gullible investors with an “Hollow Brand Name” requires condemnation.

If one or two such companies collapse, it will be like the failure of Co-operative banks and there will be an investment crisis in which no other start up company can think of going public in the near future. If there is no exit route through IPOs then even the private placements will also dry out and eventually the Start Up eco system would be detroyed.

Will the Ministry of Finance and Ministry of Corporate Affairs explain the logic for such public issues?.

Naavi

Refer this video:

Venture Capital-Silicon Valley Ponzi Scheme

 

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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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2 Responses to SEBI and Zomato set to kill the Indian Start up industry

  1. Atul says:

    The views you reflect are understandable. However,
    1. It is the responsibility of the investor to check the background of where is he investing.
    2. Why should Government play the fatherly role to an adult (as adults can only enter into a valid contract) and if the adult is naive then even God cannot help.
    3. Why have you racked up this issue after the IPO is over?

    • Answers to your response:
      1. The fundamental objective of SEBI is to safeguard the interest of all the parties involved in trading. It also regulates the functioning of the stock market. SEBI’s objectives are:

      · To monitor the activities of the stock exchange.

      · To safeguard the rights of the investors

      · To curb fraudulent practices by maintaining a balance between statutory regulations and self-regulation.

      · To define the code of conduct for the brokers, underwriters, and other intermediaries.

      2. If this argument is to be accepted, why should there be any law in the country? We can have the Jungle Raj.
      3. I got to observe this fraudulent situation only after Zomato was listed. I agree that I should have raised this issue earlier. I have been a Merchant banker and an Investment advisor in the past, have maintained weekly investment column in Indian Express for over 5 years in the past and at that time I was watching such developments regularly. But of late, I am not following this field and hence this escaped my attention. I am sorry for that.
      But now that other issuers of similar nature are likely to come in with their IPOs there is a need to raise the red flag.

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