Time for SEBI to step in

Zindagi khwab hain, aur khwab mein jhoot kya aur bhala sach hain kya

— Shailendra, Jagte Raho

Against the backdrop of its losses growing 30 times to Rs 280 crore, a prominent ed-tech company managed to raise a further Rs 1,800 crore last month on an increased valuation of Rs 1.35 lakh crore, purportedly to fuel acquisitions, and is now valued at three-fourths the market-cap of Titan Company (itself a stock market darling that is trading at an aggressive Price/Earnings or PE ratio of 100). The ed-tech company has seen a growth in value of Rs 38,000 crore in just six months in the backdrop of growing losses and three acquisitions worth Rs 15,000 crore. Its revenue grew by 80% last year, from Rs 1,306 crore to Rs 2,381 crore, with 70% of those revenues coming from the sale of tablets and laptops to students; and Rs 144 crore, or roughly 5% of revenues, came from tutorials, its flagship business.

The company has raised Rs 15,000 crore over the past four years and has acquired 100 million users. And herein, between the breadth of two numbers, lies the purported justification of value -- the extrapolation made over the $100 billion education market in India, 500 million school- and college-going students, the country’s education spend to GDP ratio being half of the target, and so on!

A booking app for hotels has applied to make an initial public offering (IPO) soon. Its ramshackle chain of lodges with oversized signboards (not to speak of its losses) is supposed to be valued at six times the market-cap of the Taj group of hotels.

We are all fond of India’s “salt-to-software conglomerate”, but it, too, is trying to play catch-up to another corporate behemoth’s masterstroke to retire group debt by building its digital property. And here, too, the only rationale for a conservative business group to start picking up digital properties in a hurry seems to be to bundle this into an entity that can be IPO-ed in quick time. The valuation euphoria has perhaps prompted the group to get into the deep end of a new-age business and valuation play as a possible means to quickly retire group debt that now stands at Rs 2 lakh crore.

Welcome to the Corporate Roulette Table!

This is really money being made by a club of private equity funds and some HNIs on the back of an unfettered supply of money where money begets money. They are inter-connected in their eco-system from seed funds to Series F and G, by advisers and retired corporate executives who join their boards and advise for fees to lend respectability, by investment bankers who, too, get their gargantuan fees from buying and selling these companies, and by valuers who value these companies with an opaque valuation lens that has no bearing on how listed companies are valued, let alone evaluating actuals versus targets, profits, tangible assets, etc. They, too, are getting paid to be compliant and to stitch a fig leaf of diligence.

“It’s a damn conspiracy, and everyone’s in on it!” – Jailor Norton, The Shawshank Redemption.

Paper money is being made at every level by every player, where companies are bought and sold amongst themselves for paper value. They all gamble on a hypothetical future value and are, in effect, gaming the system by cashing in big-time before any real value is created. Have a look at the numbers in the table above for FY20/21.

Has 2008 already been forgotten? Then, in the US, not a single player went behind bars – Lehman, Moodys, or the 10 named by CNN as the most culpable in the 2008 global financial crisis.

In 2008, the cannonball fell on the main street, with an unsuspecting public, who lost the value of their homes or, worse, their homes themselves, along with investors who lost their wealth. Closer home, taken in by the hype of brand building, retail investors will subscribe to these IPOs, and be left holding the can for evermore while members of the roulette table offload their equity insidiously into the market, reaping exponential gains in the short term.

There is something amiss when two million IPO subscribers, roughly 60% of the investing public of a recent app IPO, are less than 30 years of age, with 50% of them being first-time investors, while the employee quota is left unsubscribed by 32%. This while the issue is oversubscribed 40x with institutional investors hoping to make a killing at listing. Four months prior to the IPO, the company was valued at Rs 40,000 crore; at IPO, it was worth Rs 60,000 crore. Based on its FY21 numbers, its market-cap to operating revenue was 29 times, and it is now almost 66% higher than that, with a market-cap of Rs 1.02 lakh crore. In less than seven months, the value of this company has risen 2.5 times, with nothing to show to justify this rise.

This is how off the mark all this is. You have simply to watch The Inside Job by Charles Ferguson or Matthew McConaughey’s Fugazzi scene in the Wolf of Wall Street to get some perspective.

In the end, a business must make money by selling a good or service. Period. Valuation play is not sustainable in the long run. And when they are this off the mark, they slide into the world of Fugazzi!

The only way this will stop is if the regulators step in and set the rules of the game.

Maybe SEBI needs an offshoot that regulates non-listed companies that are externally funded and checks for valuations, valuers and anyone else who has a stake in the upside.

Maybe SEBI should stop this insidious erosion of business basics and protect a naive public by ensuring that no investor can exit by selling shares to the public unless the company lists and then shows operating profit for two consecutive years in full public scrutiny.

Maybe intermediate commissions and fees to investment bankers and valuing agencies must be delinked from the value of the deal and linked to an hour charge-out rate (as auditors and tax consultants charge, for example) to participate in a deal, with an upside granted only on the IPO and after two years of consecutive profits.

(The writer is a former MD of a Tata Company and now runs a Corporate Finance practice headquartered in Bengaluru)