IPO: A DILEMMA OF FREE PRICINGMARKET HIT BACK GREED
The recent development in the primary capital market in respect
of free pricing of Initial Public Offer has awakened and
made jittery all the policy makers, qualified institutional investors,
regulators and more importantly the capital market participants
and investors.
The Reliance Power IPO, one of the largest Initial Public Offerings
was offered to public in January 2008 with price tag of Rs.
450 per share for institutional investors and Rs. 430 per share
for retail investors. This company has a number of projects
planned by them whereas actual projects running or already
implemented, there are none to mention. There is no material
earning per share and even after considering such a large public
issue, the book value per share would be about 1/10th of the
issue price. In the absence of existing track record of earnings
and in the absence of existing operations or any major assets,
the justification based on which the Merchant Banker arrived
at public offer price is incomprehensible. The issue was substantially
oversubscribed in view of established and strong
track record of the promoter and the buoyant capital market.
On first day of listing itself the share closed at a price of Rs.372
thereby causing loss to investors. Above all serious question
come up into mind – whether the IPO Pricing Policy and Regulations in are marred by aberrations?
In the meanwhile due to several reasons including disturbance in US economy as well as liquidity tightness in the Indian financial market, the capital market witnessed another major fall in the 2nd half of January, 2008 and 1st half of February, 2008.In the same backdrop, the IPO of EMMAAR MGF Real Estate and Wolk hard Hospital also approached the market but had to make a hasty retreat by recalling their issues in view of poor response from the market. The market rejected high priced issues devoid of convincing track record or prospects. The pricing of public issue made by the companies, for several decades had been regulated through the approvals by Controller of Capital Issues, which used to arrive at the proposed price for initial public offering or other public issues on the basis of specific formula based on actual performance of the Company. The control pricing was given away by SEBI and a formula of market determined free pricing was adopted. In this scenario of free pricing the responsibility of the issuer as well as of the Merchant Banker is indeed high. SEBI needs to mandate Merchant Bankers to take the responsibility of pricing an IPO based on transparent assumptions and basis for arriving at a price for the proposed public issue. There are number of widely accepted valuation technique and methodology and issuers as well as Merchant bankers may consider permitting adoption of most appropriate alternative. In spite of this, the profit earning capacity and future projections will still remain uncertain and no codification or guidelines or transparency can give a perfect solution. It will, however, be appropriate to ensure that the basis of valuation is transparent and due diligence is undertaken by the Merchant Bankers as well as Issuers to undertake valuation in a reasonable manner. The long term success of the Issuer as well as of the capital market will be to take only reasonable valuation and not to provide undue advantage to the promoters and / or issuers. Leaving a reasonable margin for the investors will ensure long-term reputation of the issuing company, promoters and Merchant Bankers. SEBI can also consider mandating that the promoters should at least bring in 10-15% of the proposed issue at the same price in cash, irrespective of the existing capital or strength in the Company in case of an IPO. This will facilitate a balancing between free pricing and reasonableness.
In the meanwhile due to several reasons including disturbance in US economy as well as liquidity tightness in the Indian financial market, the capital market witnessed another major fall in the 2nd half of January, 2008 and 1st half of February, 2008.In the same backdrop, the IPO of EMMAAR MGF Real Estate and Wolk hard Hospital also approached the market but had to make a hasty retreat by recalling their issues in view of poor response from the market. The market rejected high priced issues devoid of convincing track record or prospects. The pricing of public issue made by the companies, for several decades had been regulated through the approvals by Controller of Capital Issues, which used to arrive at the proposed price for initial public offering or other public issues on the basis of specific formula based on actual performance of the Company. The control pricing was given away by SEBI and a formula of market determined free pricing was adopted. In this scenario of free pricing the responsibility of the issuer as well as of the Merchant Banker is indeed high. SEBI needs to mandate Merchant Bankers to take the responsibility of pricing an IPO based on transparent assumptions and basis for arriving at a price for the proposed public issue. There are number of widely accepted valuation technique and methodology and issuers as well as Merchant bankers may consider permitting adoption of most appropriate alternative. In spite of this, the profit earning capacity and future projections will still remain uncertain and no codification or guidelines or transparency can give a perfect solution. It will, however, be appropriate to ensure that the basis of valuation is transparent and due diligence is undertaken by the Merchant Bankers as well as Issuers to undertake valuation in a reasonable manner. The long term success of the Issuer as well as of the capital market will be to take only reasonable valuation and not to provide undue advantage to the promoters and / or issuers. Leaving a reasonable margin for the investors will ensure long-term reputation of the issuing company, promoters and Merchant Bankers. SEBI can also consider mandating that the promoters should at least bring in 10-15% of the proposed issue at the same price in cash, irrespective of the existing capital or strength in the Company in case of an IPO. This will facilitate a balancing between free pricing and reasonableness.
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