The Securities and Exchange Board of India (Sebi) just gave you another handle to assess an initial public offering (IPO) before buying it. Sebi announced on 28 July that IPO application forms will now carry details of the track record of merchant bankers, who bring IPOs to the public after assessing the issuing company. Further, merchant bankers will have to keep the records and documents they go through while doing their due diligence before bringing an issue to the market.
Sebi seems to have taken a cue from us in seeking out information on merchant bankers’ track record. In a similar exercise a month ago, Mint Money studied data on past performance of merchant bankers (http://tinyurl.com/3mde629). While not pinning all the blame on the merchant bankers, we gave another tool to the investor to gauge the quality of IPO before going for it. “In spirit it is an excellent move. However, there are host of statistical problems involved and controls should be put in place before such reports are brought in the public domain,” says Ajay Shah, a professor at National Institute of Public Finance and Policy.
“It could be a very strategic move. It is a perception that investors often read the offer document. By putting it in IPO forms, there are more chances that investors will read it,” says a capital market researcher, who did not want to be named.
However, the format in which the track record will be given in the form is not clear yet. “I am sure it (track record) is going to be the secondary market performance,” said the capital market researcher. Sebi refused to comment on the format.
Though the move is definitely a step forward, some have their doubts about it. “Anything that brings discipline to the market is good for investors. But I am not sure how helpful this move will be because the secondary market performance depends on many factors such as macroeconomic scenario and industry hurdles,” says a market participant, who requested anonymity.
Even Mint Money does not think that the performance of merchant bankers should be the only criteria to assess an IPO. But that it is one of the important factors is without doubt.
We took the annualized returns of each IPO in 2007 and 2008 and compared it with that from the Nifty Junior. Those stocks that had a split, bonus or rights issue were kept out for analytical hygiene.
What we found was of the 23 merchant bankers who brought IPOs in 2007 and 2008, just one firm had a positive average return for all the issues it managed. We selected this time frame for two reasons: this period was abuzz with new offerings and we wanted to give these offers enough time to play out the market cycle.
Fixing further accountability on merchant bankers, Sebi has said that they would now have to maintain the records and related document of the “due diligence” they do when bringing an issue to the market or during any post-issue activity.
The regulator says, “Board approved amendment to Sebi (Merchant Bankers) Regulations, 1992, requiring merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management, takeover, buy-back and delisting of securities.”
As of now, though merchant bankers are required to do extensive research before bringing an offer to the market, they are not required to keep a record of the activities.
“This is definitely a significant move. Some issue may crop up after a year of listing and if merchant bankers retain those papers, they will serve as a proof of facts stated earlier,” says Prithvi Haldea, chairman, Prime Database, a primary market tracker.
The regulator may at any time seek to check the documents of due diligence, according to the press release issued by Sebi. Also, they can now be held accountable if documents verifying facts in the offer document are not produced when sought.
However, how long bankers are supposed to keep these documents is not yet known.
For more updates on the issue, watch this space.