The Securities and Exchange Board of India (Sebi) issued a circular on Tuesday with a defined format for merchant bankers on disclosure of price information of past initial public offers (IPOs). It is applicable to draft IPO prospectus filed with Sebi on or after 1 November.
It comes two months after its 28 July announcement, when it made mandatory for merchant bankers to provide details of their track record in the IPO application forms. They were also asked to keep detailed record of due diligence process for IPO pricing.
Merchant bankers, individually or via a syndicate, are responsible for arriving at a price for an IPO.
A month before Sebi’s 28 July announcement, Mint Money undertook an exercise, triggered by Sebi’s thought on the matter, to figure out if there is another parameter to gauge the efficiency of the valuation process undertaken by merchant bankers. Basically, the idea was to look at returns from an IPO investors’ prespective. The need for this was felt on account of the disappointing post-listing performance of a number of IPOs in the recent past. We worked on a report card on average stock performance of each merchant banker and applied a methodology to examine price performance of all IPOs that came to the market in 2007 and 2008. The numbers threw up surprising results: nearly 80% (74 out of 94) listings in 2007 and 2008 were trading below their offer price at the time of this exercise. The worst performer lost as much as 95% of its original value in absolute terms.
The format requires merchant bankers to give information for three financial years, subject to a maximum of 10 IPOs. There has to be a separate table for each merchant banker attached to the issue. There are two tables; the first one is for details on specific issues with opening and closing price on the opening date and closing price details on the 10th, 20th and 30th calendar day from the listing day. These are compared with the benchmark index on the same day.
The second table is a summary of price performance of IPOs in a given financial year; it details the percentage of IPOs trading at a discount and at a premium on the listing date and on the 30th calendar day from the listing day.
A senior investment banker with a large domestic investment bank said, “This information is more relevant for the issuer to choose a merchant banker. It’s unclear how it will help investors choose an IPO. Moreover, there will be a lot of additional information in the prospectus because there could be many merchant bankers to a single issue.”
How does this help you?
Sebi has made it easy for an investor to see how the merchant banker’s previous issues have fared. Many a times IPOs may be overpriced, enabling the company to raise more money than its fair value; post listing, the share price corrects, causing losses to retail investors.
In the past, poorly rated IPOs have given good returns, while high rated IPOs have not. The new requirements are an additional tool to judge whether or not to invest in an IPO.
It’s difficult to assess what the time frame for judging past performance should be.
Says a research associate from IGIDR Finance Research Group, who did not want to be named, “To begin with 30 days is fine. After a reasonable number of IPO’s of different sizes to hit the market, a study can be done to check the suitability of the current disclosure of 30 day time period.”
While Sebi has tried to include all important parameters in the format, specifying 30 days’ performance may not be enough, as price discovery (adjustment to fair value) could take longer depending on market conditions.