New Delhi: Amid continuing debate on whether grading is mandatory for initial public offers, the market regulator Sebi chief M Damodaran on 28 March asserted that it was a step for helping average investors and the issue has not been understood properly.
While one section of market observers believe that the decision to make IPO grading mandatory was not warranted, others believe that it is a welcome step for stemming the “overheating” in this segment of primary market.
It’s not just the economy whose “overheating” has become a matter of concern, the IPO market has got its own share and these measures, like mandatory grading and tightened disclosure norms, could just be the beginning of a prolonged process to tackle this issue, said an analyst.
According to IPO market tracking firm Prime Database, there are public issues worth 1,75,000 crore in the pipeline, while companies are estimated to raise as much as Rs 45,000 crore in 2007 alone from as many as 150 IPOs.
“Overheating has become a buzzword in Indian economy and while the broader macroeconomic issues are being addressed at institutions like Reserve Bank of India, Planning Commission and Finance Ministry, the market regulator SEBI is trying to do its own bit through measures like mandatory IPO grading and enhanced disclosure norms,” said another broker.
However, another section believes there is no overheating and grading system could be a “waste” of time as India already has a good disclosure-based regime.
“There is no flooding in the IPO market, six to seven IPOs in a month is normal as our listed companies domain is still small,” Primedatabase CEO Prithvi Haldea said.
We already have a good disclosure-based regime which serves the purpose of investor awareness, Haldea added.
The need for a IPO grading mostly arises in a merit based regime and investors do not need regulator’s interference in the primary markets, he said.
While addressing reporters on 28 March in Mumbai, Damodaran took a dig at critics of decisions like mandatory grading and tightened disclosure norms for real estate firms, while saying those criticising Sebi’s decisions are unaware of the basic fact that regulator’s job is to protect investors’ interest.
However, not all are opposed - Real estate giant Parsvnath’s Chairman Pradip Jain said new norms would bring realty firms’ land bank valuations to realistic levels.
Experts believe Sebi’s new initiatives would weed out those from the IPO process that scrap their plans after getting bad response as well as those who manage to get good subscriptions just because of “herd mentality.”
IPOs generally see a big rush of retail investors towards end of the book building process, mostly driven by response shown by institutional investors and without reasons like sound fundamentals. After scrapping of IPO plans post bidding, investors have to wait for months to get the refunds.
It would also safeguard investors from those IPOs where share prices have plunged sharply below the issue prices just days after getting huge over subscriptions.
Share prices of a number of companies particularly in the real estate sector have dropped sharply in the recent past, some times much below the issue prices.
There have also been allegations that some firms arrange proxy bidding from big investors just to get a good amount of subscriptions from retail investors.