SEBI trying to put life to dead IPO Market

October 2, 2011   ·   0 Comments

A cursory look at the BSE home page shows that there are currently six IPOs which are open for subscription, yet there is not even an iota of interest. Usually, IPOs create some buzz and there is always a sense of some investor interest. We hear about the IPOs and investors actually enquire about the prospects. But this time around, investors just do not seem to care.

www.stockssavvy.comWhy this change in attitude? Quite a few reasons though the biggest being that majority of the IPOs, after getting listed sinks to the bottom like a heavy stone in a bucket of water.  Newly listed stocks – Brooks Labs, SRS, L&T Finance, Tree House, TD Power Systems and PG Electroplast are all amongst the losers. More than three-fourth of their value has been eroded over the past two months. One common factor between all these issues – all had hit the stratosphere, with logic defying high prices in the initial days of listing. Another common thread is that most of the issues do not find subscribers even till the last day; but in the last couple of hours before closing, miraculously, the issues gets fully subscribed.

Investors are gullible but a few lessons they have learnt well. They now know to recognize such issues, which are manipulated by the promoters and merchant bankers.

Quality is a big suspect in today’s IPOs. There has not been a single issue in recent times, which we have recommended in our IPO Analysis section.    Investors can smell foul play at work from a distance. Also, the company promoters and the bankers suffer from an acute case of myopia as they themselves are not able to view the company logically thus pricing them way beyond what it deserves. Today when quality stocks, with well-known promoters and track record of proven performance are available, why would anyone want to risk money in such dubious IPOs?

It would be too naïve to lay all the blame on the bankers alone; they cannot price the issue without the promoters consent. And both, hand-in-glove are busy hoodwinking the investors. Yes, what is wrong is the abuse of the free pricing regime. Despite weak markets, such aggressive pricing is slowly but surely killing the .

Apart from these endemic reasons, there is also a sense of complete disdain, with investors preferring to sit on cash rather than even consider an IPO. Complete lack of fancy due to the current uncertain global environment has further doused the already ebbing fire. Not just in India, even in most of the Asian markets, IPOs are taking a huge hit, with many either getting postponed or deferred. And this is proving to be self-destructive as even in the Indian markets, quality issues prefer to stay away, leaving only the field free for the dubious ones. Thus no quality issue, there is no investor interest; no interest means poor quality companies are making merry and when they make merry, like the scavengers, it is time to leave.

Is there any light at the end of this tunnel? For us to see light, one thing has to happen – quality IPOs like ONGC or from the private sector come forth with their IPOs but for them to do that, the overall sentiments have to necessarily improve for which again, Europe and USA have to bounce back. Now that is a tall order and might take a long while. The light is there but the tunnel, for now, is too long.

Stock market regulator Securities and Exchange Board of India (SEBI) has late yesterday evening issued two circulars with the intent to improve the process of primary market offerings for equity shares in the country, currently facing very challenging times. The first circular is titled ‘Disclosure of Price Information of past issues handled by Merchant Bankers’ while the second deals with ‘Contents of Application-Cum-Bidding Form and Manner of disclosure’. Both these circulars will be applicable for RHPs and prospectus filed with effect from 1st November 2011.

While both these circulars are aimed at making the IPO process more transparent and investor-friendly, it also strongly signals the regulator’s concern to trap the declining investor interest in recent primary market offerings, as can be seen from total funds raised via IPO, which have plunged to less than Rs. 5,700 crore year-to-date, from Rs. 12,600 crore in the same period last year.

Disclosure of Price Information of past issues handled by Merchant Bankers

Key points covered in this circular are:

  • Due diligence and marketing functions of merchant banker likely to be segregated. Currently, fees are paid by issuer company to merchant bankers based on the investor’ appetite generated by the merchant banker to the issue, hence the marketing function plays the key decider for the banker’s income. While the due diligence role marks great responsibility and liability on the bankers’ shoulders, the marketing role is its real bread-winner. With segregation of these two roles, not many merchant bankers will come forward for the due diligence function, despite having support of lawyers, auditors, company secretary and technical experts for conducting the due diligence, because of the huge liability attached to discharging that duty.

 

  • Merchant bankers to disclose price information of all previous issues handled by them. They will be required to provide IPO size, issue price, current price, benchmarked with the index, for all individual issues handled in the past. This will be a big-eye opener and will caution price-rigging to a great extent. Also, credibility of all merchant bankers will be put to rigorous test by this disclosure. A highly appreciated move!

 

  • Mandatory valuation comparison with rivals. Although currently a comparison is made with listed peers, a more specific and to-the-point analysis is always more meaningful and welcome. This is aimed at curtailing the current lacuna wherein non-consolidated financial numbers are compared with consolidated financials or historical data is compared with current financials.

 

  • Issuing company to provide ‘specific and useful’ information, instead of off-the-shelf industry data, giving detailed insight into company prospects. General risk factors to be done away with more specific and decision-making risk factors. Thus, a general remark on forex risk or exchange fluctuations will make way for number-bearing facts which will help investors take a meaningful call.

Contents of Application-Cum-Bidding Form and Manner of disclosure

The Application-cum-bidding form is aimed at making more investor friendly, standardized and uniform, by eliminating redundant columns, using colour identification and disclosing information in a more concise format that will be appreciated better by the prospective investors. This move partly arises from one of SEBI chief’s earlier statements that ‘as an individual, he himself finds it very difficult to appreciate the information in the application form’.

Thus, SEBI has been taking steps (probably just baby steps) in the right direction. This move, in addition to the concept paper on regulating investment advisors, issued earlier this week, is well appreciated to restore the credibility and faith of our capital markets and keep investor confidence in check, which has definitely been shaken, if not stirred.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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