It was music to the ears of investors and investor organisations when Securities and Exchange Board of India chairman C. Bhave nudged the conscience of the merchant bankers quite sharply for siding with promoters against the interests of investors when pricing initial public offers (IPOs). It is the first time that a Sebi chairman

has done this and it has been widely welcomed. It is not that Sebi’s attention had not been drawn over the years to the excessive pricing of IPOs, particularly in boom time. But most of the time it turned a deaf ear. It is a well known fact that investors have lost thousands of crores due to excessively priced IPOs and that unscrupulous promoters who collected crores of rupees during boom periods vanished, leaving a legacy of so-called vanishing companies. In fact, the government is still going through a despicable charade of trying to locate them. But till today the investors have not got a paisa back. According to a study released on Friday by the research wing of the rating agency Care, of the 116 IPOs issued between August 2007 and August 2010, 62 per cent are currently trading lower than the lower IPO price band while 35 per cent are trading higher than the upper IPO price band. It says IPO mis-pricing was prevalent in 2007-08 with about 75 per cent of the issues being overpriced. In another statistic provided by a Sebi executive director, investors have not recovered their money in most of the IPOs that came between 2005 and 2010. She, in fact, suggested that merchant bankers should measure their performance and advertise it in terms of issue price. One hopes that the Association of Merchant Bankers of India takes this suggestion seriously.
After the Ketan Parekh scam of the early years of this century, a joint parliamentary committee had in its report said that “two vital issues — pricing and tracking the end use of IPO funds — have been totally neglected by Sebi. Sebi’s plea that in the free market the regulator need not interfere is not acceptable to the committee”. It suggested that in a highly imperfect market, with a history of fraud and manipulation, Sebi should either use industry benchmarks or evolve other suitable criteria for pricing IPOs and auditing the end use of funds. But Sebi did not bother to take this forward. Since the stock market is booming currently thanks to the inflow of funds from foreign institutional investors, Sebi has been flooded with draft offer documents from private sector companies. PSU companies are also in the pipeline but they are not a problem as they have rewarded investors handsomely in the medium term.
The bottom line is that there is something inherently wrong in the present system. Once you give promoters and merchant bankers the freedom to price IPOs, they will naturally extract the maximum they can. They are not in the business of charity. They have shown time and time again that pricing cannot be left to their discretion. Sebi has a tremendous responsibility, along with the ministry of company affairs. Sebi has said this week that it is thinking in terms of some guidelines for merchant bankers regarding pricing of IPOs and various issues specific to IPOs, like advertising and disclosures etc. One hopes this will be done on a war footing, especially since the term of the present Sebi chairman expires next year.
One is not suggesting that the country return to the era of the Controller of Capital Issues, which decided the pricing on a case-to-case basis rather strictly. But it is necessary for Sebi to lay down and evolve some code of conduct, or guidelines, on the basis of net worth and other such criteria for allowing premiums.