This article is based on two axioms — one, reasonable people prefer bargain deals; two- merchant bankers are usually smarter than an average bargain hunter. This story is about the merchant bankers Emkay Global Financial Services Limited and Incred Capital, who contradict both the axioms and appear naiver than your average bargain hunter — raising more questions than answers. It would also explain why the shares of Emkay Global plummeted by more than 30% within one week.

Emkay Global is a public listed company and a merchant banker that brought forth the IPO of Ethos Limited along with another merchant banker, Incred Capital. This IPO was a first for Incred Capital as a merchant banker, which is not a public listed entity.

The IPO of Ethos Limited failed to attract any interest and created a historic low in the Indian stock market. Failing to garner the minimum number of subscriptions required for their IPO, the IPO of Ethos Limited devolved. Most seasoned players of the stock market can't recall the last time an IPO with an issue size of over ₹400 crore had devolved.

Ethos IPO included offer for sale (OFS) worth ₹97.29 crore and fresh equity issuance of ₹375 crore. Ethos Limited’ offer price band was ₹836-878. The company was adamant to peg its share price at the highest band of ₹878, at which it failed to attract the minimum number of total subscriptions required, that is, 90% of total shares offered. Consequently, Ethos Limited IPO devolved.

A devolved IPO is not a matter of public concern, but what happened after Ethos Limited IPO devolved should be.

Questionable decisions of merchant bankers Emkay Global, Incred Capital

When an IPO gets devolved, the Registrar of Companies sends a notice to the merchant bankers that they may buy out the remaining shares offered in that IPO. If merchant bankers fail to buy, then the IPO would be deemed as failed issue and would not get listed in the stock market.

After devolvement the issue size of Ethos Limited was reduced to ₹400 crore from ₹472 crore. Interestingly, both Emkay Global and Incred Capital bought the remaining shares of the reduced size of IPO of Ethos Limited at the highest bid price of ₹878. They paid ₹14 crore each.

By law, in case the merchant banker agrees to buy the shares of the devolved issue, it is free to propose a price within the IPO price band. Logically, Emkay and Incred Capital should have proposed a price lower than the highest bid price, but logic seems to have deserted this particular IPO.

Any reasonable person when given the choice to buy a thing available at two price points will choose the lower price point. The merchant bankers of Emkay Global and Incred Capital did not. It is hard to imagine that they agreed to buy the shares of a company at a higher price! Was that out of naivety or or generosity. The moot point is the corporate governance, the intent of the merchant bankers, and the intellectual and ethical qualities of the employees who were involved in the Ethos Limited IPO.

The ethical and professional breaches by merchant bankers of Ethos Limited IPO

The entire responsibility of bringing forth an IPO lies with the merchant bankers. In the case of Ethos Limited there are too many instances that put a question mark on the ability and credibility of the merchant bankers.

The price band and subsequent price discovery of an IPO is also the responsibility of the merchant banker. They are supposed to do due diligence before proposing a price band that resonates with the market demand and a company’s strength as a share market investment. Clearly, the proposed price band of Ethos Limited does not make sense to the market. How did it make sense to the merchant bankers?

This price discovery happens after getting the feedback from the market in the form of applications for subscription where applicants bid at various price points, within the band.

However, in Ethos IPO both the merchant bankers and the promoters stuck to the highest bid price of ₹878 without paying any heed to bid prices they received for subscription. It is the duty of merchant bankers to guide and inform the promoters of the price point discovered for an IPO. In this case, it seems that the merchant bankers either ignored their duty of price discovery or were bullied by the promoters to stick to an unrealistic share price.

It is not surprising that the market has punished both Emkay Global and Ethos Limited by reducing their market cap. Emkay Global fell over 30% reducing its market cap by one-third after the incident while Ethos Limited got listed with 10% fall.

Has Emkay Global failed in its responsibilities towards its shareholders?

Fortune India posed questions to Emkay Global via email as to how they assessed such a premium price for Ethos Limited shares when the market has clearly rejected such an offer price? Why did they not allow subscriptions of lower price bids? How was their price discovery so much off the mark from what the market was suggesting? Why did they agree to buy the shares of Ethos Limited at a price that caused the IPO to devolve in the first place? And how will they justify the purchase of Ethos Limited shares, at such premium, to their shareholders?

In response to Fortune India’s questionnaire, Emkay Global responded, through its PR agency, that the company’s investment banking division cannot respond to such questions as they are very sensitive in nature.

It is also noteworthy that Emkay’s share prices started plummeting a week ago. So, shareholders who had the wherewithal to fathom such information earlier than the average investors must have started selling their shares before the general public. As usual, the retail investor, who has limited understanding of market movements, is now the sorry owner of shares of Emkay Global that have lost over 30% of their value within one week and Ethos which has listed 10% lower already.

Emkay Global’s actions and decisions, both as a merchant banker and a public listed company, raise questions of corporate governance. Prima facie, irrational financial decisions and apparent breach of responsibilities as a merchant banker in Ethos Limited IPO may spread to future IPOs unless there is a scrutiny of these decisions.

Both the board of Emkay Global and stock market listing authorities can take cognizance of the decisions as the fall in Emkay’s share price has widely affected its minority shareholders. After all, most affected are the gullible retail investors who may not even have the wherewithal to identify or garner deeper information about such questionable decisions of their company.

Incred Capital

Questionable! Devolved Ethos IPO saved by Emkay, Incred at highest price