Twitter takes the IPO route. Can you invest?

Twitter Inc. has certainly redefined, if not reinvented, the way people communicate. But whether it will be able to redefine returns for shareholders of Internet companies remains to be seen. That will be known only after the San Fransisco-based microblogging company completes the most anticipated initial public offering (IPO) of shares this year and starts trading on the stock exchange, probably by mid-November. It was on 12 September 2013 that Twitter, whose users have generated over 300 billion tweets since its inception in 2007, announced that it had filed documents with the Securities and Exchange Commission (SEC)—the US securities market regulator—for an IPO, setting markets abuzz. Given that most news seems to break on Twitter these days, it was only befitting that the company’s management disclosed its IPO plan through a tweet in just 136 characters. At the last count, 14,853 people retweeted the IPO message and 3,482 people made it their favourite, more than sufficient for the world to know that something big is on its way. The last time that a tech company generated this much hype in the markets was Facebook Inc., the social networking site that sold shares in May 2012. Facebook disappointed investors initially but has recovered now. Offered for $38 apiece, Facebook shares dropped to a low of $27 in June 2012 and is currently trading at $53.85. 

 

Incorporated in April 2007, Twitter has changed the way the world communicates—in 140 characters or less—and is now offering people an opportunity to partake of its profits, or the losses, as part-owners. The pricing and other details of the Twitter IPO, including the dates of the sale, are yet to be announced.

Can Indian residents invest in the buzziest IPO of the year? The answer technically is yes, but bidding for shares can be far more complicated than compressing thoughts and sharing it with the rest of the world in 140 characters. 

 

Says Prateek Pant, director (products and services), RBS Private Banking, “Technically, you can invest in the IPO but you will need an offshore broking account for that.” As per the Liberalised Remittance Scheme of the Reserve Bank of India (RBI), every resident Indian can remit up to $75,000 (around Rs.45,75,000) per financial year for any permissible current or capital account transaction. This includes investing in shares and debentures outside India. 




ndividuals can also hold cash in foreign currency for the permitted transactions in foreign banks outside India. The remittance limit was on 14 August lowered to $75,000 from $200,000 per financial year in an attempt by RBI to restrict capital outflows and prop up a slumping rupee. Since Indian residents are allowed to freely remit money under the limits prescribed, investors will need a financial entity that is registered with the US regulator to facilitate the purchase of shares. However, several large brokerages in India such as Kotak Securities Ltd, Religare Securities Ltd and ICICI Securities Ltd which have tie ups with offshore brokerages do not offer the option of participating in an IPO. Says B. Gopkumar, executive vice-president and head of broking, Kotak Securities, which has a tie up with Saxo Capital Markets Pte Ltd: “The platform is for secondary market transactions as IPO structure is different in different countries.”






Further, the practice of share sale in an IPO in the US is very different from India. Here we have clear distinction between institutional and retail investors, but that is not the case in the US. “The SEC does not regulate the business decision of how IPO shares are allocated,” says an SEC document on IPOs. Share in an IPO in the US is offered by an underwriting syndicate which  sells shares to investors after buying it from the issuer. So even if some brokers are part of the syndicate, they prefer selling to institutional clients or individual investors with very high net worth. Therefore, even if you manage to open an account at an offshore destination, such as Singapore or Dubai, getting an allotment will be extremely difficult. The broker may not have any incentive to offer you shares. Also, the syndicate members prefer selling shares to such investors who are not likely to sell immediately after listing. Syndicate members have interest in holding the price after listing.

 

Therefore, it is even difficult for resident individual investors in the US to get shares in a “hot” IPO, let alone foreign individual investors. If you really intend to own shares in Twitter, you may have to wait till its listing as foreign brokerages having tie up with Indian brokerages allow investors to trade in the secondary market in the US.

This may actually work to your advantage as you will be able to see how the market reacts after listing and buy when you think the price is right. Remember, buying in an IPO is the first chance to buy shares in a company, not the last. If you decide to buy in the secondary market, as mentioned above, several brokerages have tie ups with foreign entities.

However, Indian brokerages with such tie ups are only facilitators and a separate account will have to be opened with the overseas entity. Investors will have to send documents such as proof of identity, proof of residence and Permanent Account Number, which can be verified by local brokerage firms on their behalf. Once all the formalities are completed, the account will be opened and investors can remit money for buying shares.

 

 

The local brokerage can help during the procedure, but it cannot advise investors on trading abroad. The process could take up to two weeks. Investors whose brokers don’t have a tie-up with an overseas entity have the option of either hiring the services of another broker or hunt for an entity that gives an option to trade in the US. But if the foreign firm does not have a presence in India, going through the formalities of opening an account could become a logistical and procedural problem. “It does not make much sense for resident Indians to explore the possibility of opening an account with an overseas broking firm independently since Indian firms with their foreign partners are already providing this facility,” says Ankit Swaika, senior vice president and head (investment advisory and research), Religare Macquarie Wealth Management Ltd.

Here are some of the statistical and other information about the company that may help investors decide whether or not they want to invest in the company, but more information such as price and exact date.

 

 

According to an SEC filing by Twitter on 3 October, the company earned revenues of $316.9 million in 2012, a jump of 198% over 2011. It has more than 215 million monthly active users and 100 million active daily users who create about 500 million tweets every day. The company registered a net loss of $79.4 million in 2012. In the six months ended June 2013, Twitter had a loss of $69.3 million. Third-party advertising is the main source of income and constituted 85% of revenue in 2012. Although the exact size of the issue and price of shares being offered are still not known, analysts in the US have started debating the merits and demerits of investing in the IPO. While some are in the favour of having a company in their portfolio with strong growth and high brand value, others first want to see the company generate profits before they open up their wallets to buy what is being billed as the next big thing in tech IPOs. Investors who plan to bid in the IPO or after listing will do well to make sure that they bid for the shares, not the hype.

listing will come in as we get closer to the issue. 

 

GAURI KESARWANI.

PGDM- 1st (sem.)