SEBI must not intervene in IPO pricing
A long-awaited correction in stock prices and muted listing gains seem to be rapidly dissipating the froth in the Initial Public Offer (IPO) market. With over 62 offers mopping up ₹1.25 lakh crore in April-October 2024, the primary market was on course to set a record this year. But the recent barrage of Foreign Portfolio Investor (FPI) selling seems to be cooling investor ardour for main-board IPOs.
In contrast to the over-subscriptions of 50 to 100 times commanded by offers until the middle of October, recent ones have managed over-subscriptions of just two to four times. This is despite well-known names such as Hyundai Motor India and Swiggy tapping markets. Listing gains are no longer a given either, with five of the last ten offers listing below offer price. However, these are healthy trends that ought to be welcomed. Waning subscriptions may quell promoter greed for timing their offers to the peak of the business cycle and pricing shares at valuations that leave zero money on the table for investors. A Securities and Exchange Board of India (SEBI) study in September 2024 showed that 65 per cent of the monies raised in IPOs went to ‘selling shareholders’ such as promoters, instead of companies. Waning listing gains may also force investors to pivot from flipping IPO shares to taking a long-term view of business prospects. This is a much-needed shift; the SEBI study showed that retail investors liquidated 43 per cent of the shares allotted to them within a week of listing.
With this market-driven course correction already underway, there may not really be a case for SEBI to increase its oversight of primary offers and sign off on IPO pricing, as it seems to be doing of late. This newspaper recently reported that while clearing offer documents for IPOs, the regulator is insisting on a “soft sign-off” on pricing. SEBI is said to be evaluating IPO price bands based on peer-group valuations and recent rounds of fund-raising. This intervention may be well-intended. IPOs are fraught with information asymmetry because selling shareholders (promoters) are privy to information that buyers don’t possess. But finding the appropriate valuation for a business is a job for merchant bankers, and is more an art than a science. Theoretically, fair value calculations change dramatically based on the assumptions one makes on the economic growth trajectory, interest rates and other variables.
Besides, there are fuzzy variables such as governance record, market position and competitive strengths. It is not a good idea for the regulator to apply rough-cut methods such as peer-group valuations or previous rounds of funding when clearing IPOs. Quite apart from the fact that the exercise can throw up wrong conclusions, any belief that IPO offer prices are “approved” by SEBI can prompt retail investors to take on further risk. These challenges are, in fact, the reason why India ended the Controller of Capital Issues regime in 1992, leaving IPO pricing to market forces. This is a slippery slope that the regulator should not get on to.
