Wednesday, February 13, 2008

Does SEBI have control over IPO pricing?

Ravi Kant

The failure of much hyped Reliance Power to list at a premium on Dalal Street was in line with the negative sentiment created by the withdrawal of two high profile IPOs - Wockhardt and Emaar MGF.

THE IPO market in India is seems to be passing through turmoil. One after the other, two big issues have turned flat on the primary market and the much-hyped Reliance Power has failed terribly on its debut day. Plunged by selling pressure, the price of Reliance was closed much below its issue price (closed at Rs 372). Earlier, the two issues, namely Wockhardt and Emaar MGF, were withdrawn by their issuers due to poor response from investors.

Is the dismal performance of Reliance Power shares on their debut day also due to aggressive pricing? Whatsoever the reason may be in the case of Reliance Power, the pricing of the IPO in India should be largely discussed. One of the reasons quoted for the failure of Wockhardt and Emaar MGF IPO is the aggressive pricing of the issue. The question is how will the ill informed and small investors know whether an issue is fairly priced or aggressively priced?

Does the SEBI, the highest statutory body in capital market, have any control over the pricing of primary market issue? Is it not the responsibility of SEBI to inform investors about the pricing of any particular issue? If it cannot inform the general public, it should have some control over pricing so that in the mad rush for making money overnight, people should not end up eroding their capital. After all, if any commodity price is excessively hiked by its producer, the government tries to control prices of that commodity by several means. Cement is an example and in the same way, for SEBI, share is a commodity only. It is the primary responsibility of SEBI, to control its issuers and not allow them to price their issue beyond a certain level.

If you see the pattern of applications received in case of Wockhardt, it would be very clear that ill informed retail investors have applied in most numbers because of the name of the company - Wockhardt, without assessing the pricing of the issue. Institutional investors, after seeing the aggressive pricing in terms of PE of 2008 of the company, have kept themselves away from the issue. Comparing the valuation to the other players in the same business, it was said that Wockhardt has priced its IPO very aggressively. Later on, the company marginally reduced its price and increased the timing also but was not able to convince its institutional investors. Another IPO, Emaar MGF, was also not liked by investors due to its aggressive pricing.

Retail people should thank the institutional investors and the management of the two companies who have withdrawn their issue. Otherwise, crores of rupees of retail investors would have been locked up after the dismal performance of the two issues on the bourses. Already people have burnt their fingers in several such issues, which are still being traded below their IPO price, even after one year of their debut.

The ongoing discussion by SEBI, to introduce circuit filters on the issue date is a welcome move to safeguard the investors and particularly the retail investors. But it is beyond understanding what prevents SEBI from stopping an issue if it finds that the issue is aggressively priced. If a small broker can assess the valuation of an issue, being the top most body, SEBI must be having all those facts and figures. SEBI should not clear the primary issue, if it finds it aggressively priced.

After all, to safeguard the interest of investors is the duty of SEBI. This is most important, especially in India, where the credit rating of the issue is at infancy and people hardly go through the rating agency report. In the name of price discovery and book building how long will the ill informed poor retail investors be cheated by greedy corporates?

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Stock Marketed said...

Ravi, the Reliance Power IPO "DID NOT FAIL" but it was beaten down by on the day of listing, just because of the selfish motives of big brother Mukesh Ambani who wanted this IPO and listing to be unsuccessful. I am glad that ET has mentioned something about this in their article Also there is some who has published a lot of details about this and all Reliance Petroleum fraud on . It is surprising that SEBI is still asleep with all this.
Small investors like me would really be happy if such culprits are taken to task.