Tuesday, June 26, 2012

Book Building Exercise

Vasu Reddy From Chicago

Just about every company that is formed and wants to continue to be in business develops their plans to build the asset base and raise capital.  The founders or promoters of a company typically plan various levels of raising the capital to meet the demands of their business plans and after the business takes off the expansion plans and growth plans.  World over the same exercise of developing plans and raising capital is the most common method of doing business.

Also common practices are using contacts to raise private capital.  Many times you go to family and friends and extending the same to their families and friends.  Much of the private capital is also raised by approaching wealthy individuals through contacts.  The practice of raising money is similar world over and especially private capital has a lot to do with who you know and how to get to them at the right time to seek investments.  Also comes with such capital is quid pro quo of help with other business interests that might have common investors or common interests.  Typically investors stick to one type of industry so that the help required by one another can be easily associated through investment or common shareholders.

Private equity investment is a major part of getting a business ides out to the market and fostering the viable ideas until they mature into sustainable businesses which are self funding and profitable, and eventually become public enterprises.  There is a process of value addition to each stage of the business, and the early participants do benefit from their risk, and with additional round of funding and business development the value proposition grows for the early participants.  The success of the business is paramount to protecting the investors and only when the business is a successful enterprise the investors receive their money back and some, and the rate of success of the start-ups is not too great the world over.

Irrespective of the type of kind of investments made, the risk of losing the money far outweighs the returns, and the percentage of successful enterprises is quite small.  For whatever reason private investments are made, he investor takes a great risk in placing bets on an unknown and untested business, purely based on the potential of the business presented.  If an investment is made based on the favors received then the money is spent in just returning the favors rather than risking the money.  No real businessman will risk large amounts of money just to return the favors rather they will just pay for it and get it over with.  If a well known and respected industrialist or industrialists are placing large amounts of money into a new business, they must have spent enormous energy in understand the risks and rewards and then only put forth their investments.  Also, if they were somehow paying back for the benefits received then they cannot be well planned businessmen.  If they have invested in a growing business and add value to the ongoing operations, it is rather obvious that they appreciate the value of their judgment and experience in making investments.

The whole matter of public interest should be why anyone would invest money into a new enterprise without placing appropriate value for their money.  Will they not just pay for any favors that they might have received through middlemen, rather than putting themselves in the glare of CBI or any other authorities.  Will it make any sense for big businesses to approach governments for permissions and permits and not be asked for return favors?  What were the corporate policing bodies doing when the books were being built and the value of the shares being publicly registered?  What will happen if every major corporate house was to be vetted out for book building or returning favors scenarios?

It would be difficult to believe that major business leaders would make large investments without properly thinking through the process of investments.  It is also inappropriate to believe that big businesses do not need any help from government in developing the infrastructure they need to continue doing business.  While the decision making is normal the moral policing are looking at the market dynamics rather than the decision making of the policy makers.  If the government starts to contend that book building can be done without quid pro quo then there will never be big businesses and never be start-up businesses with any potential.

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