Diagnostic laboratory chain Thyrocare’s IPO has entered troubled waters with the market regulator Securities and Exchange Board of India (SEBI) taking cognizance of certain questionable transactions in the past. These include issuance of shares to employees and relatives by the company’s founder and chief executive officer (CEO) A. Velumani. In a string of transactions in 2005, Velumani issued shares to about 51 people. According to the Companies Act (1956), offer made to more than 49 people is deemed a public issue and thus, requires the nod of market regulator. Although this limit has been increased to 200 people in the new Act of 2013, old laws are applicable on back-dated transactions.
Since the company is yet to file draft red herring prospectus with SEBI, the compliance issue is likely to delay the IPO which would have provided an exit to existing investors CX Partners and Norwest Venture Partners. CX Partners holds about 27% in the company while Norwest Venture Partners owns 10% equity stake. According to a report by the Mint financial newspaper, CX Partners is talking to other private equity investors to sell its five-year-old investment in the company due to the delays. The report cited two unnamed people with knowledge of the matter.
In such cases, the regulator takes one of the two paths – either imposing a monetary penalty on the company or asking it to make a public offer. Since Thyrocare is anyway planning to enter the primary market, a financial penalty appears to be the best recourse for the regulator. Earlier this year, Reuters reported that the company was planning a stock market listing by the end of June through INR640 crore IPO. The company was expected to sell nearly 25% of its shares in the IPO.
Thyrocare – which bills itself as the world’s largest thyroid testing laboratory – competes with Dr Lal PathLabs, Metropolis Healthcare, SRL Diagnostics and The Apollo Clinic. Incidentally, Dr Lal PathLabs is also in the process of raising funds from the IPO market. The company is currently believed to be scouting for investment banks for its INR700 crore IPO.