Mumbai: India’s capital market regulator has decided to fast-track the clearance of offer documents for public share sales and urged investment bankers to price initial public offerings (IPOs) at least 25% lower than the market price of listed peers, in an attempt to revive near-comatose primary markets.
Additionally, the Securities and Exchange Board of India (Sebi) has expedited meetings with investment bankers while continuing to augment its team strength to complete the scrutiny of IPO applications faster, said four persons, including officials at Sebi, aware of the development.
“Pricing of issues is the key to revive primary markets. In recent meetings over the past few months, Sebi has told merchant bankers to offer unlisted firms’ shares in IPOs at prices that are at least 25-30% lower than the stock prices of their listed peers. If they agree, primary market issuances will surely become attractive,” said one of the persons, all of whom spoke on condition of anonymity.
“Though most of the bankers seem to be unwilling to accept the reality and revise their pricing rationale, some companies have agreed to offer a steep discount on IPO shares (as compared with the stock prices of their listed peers),” the person added. “They are planning to launch their IPOs shortly.”
Sebi’s move assumes significance against the backdrop of a wobbly secondary market that has taken its toll on activity in the primary market, which includes public issues such as IPOs; rights issues, or sale of shares to existing shareholders; qualified institutional placements, or sale of shares to institutional investors.
In the secondary market, shares and securities listed on stock exchanges are traded. Primary market activity is influenced by the behaviour of the secondary market.
Although Indian stock indices are trading marginally above the year-opening levels this calendar year, stock prices have fluctuated widely, as indicated by the volatility index, which has risen by 22.21% to 18.27 so far this year.
The volatility, a reflection of India’s uncertain economic outlook and weak investor sentiment, has discouraged companies from tapping the stock market; they have preferred to raise capital through debt securities instead. Consequently, the debt-equity ratio of 46 out of the 50 firms linked to the Nifty index of the National Stock Exchange has gone up. Retail investors have turned to other asset classes such as gold and real estate.
The benchmark index of BSE, the Sensex, on Thursday closed at 20,128.41 points, up 3.61% over its January levels. The Nifty is trading at 6,038.05 points, up 2.25% in the year to date.
Between January and June, eight firms launched IPOs and raised Rs.83.86 crore. During the same period last year, eight companies raised Rs.1,311.40 crore. In the January-June period of 2011, 19 firms raised at least Rs.3,377.32 crore through IPOs.
Many firms have put their IPO plans on hold because of the weak investor sentiment. India’s largest cellphone maker Micromax Informatics Ltd, which received Sebi nod for an IPO in 2011, is “not in a rush to list, we are looking for the right time”, said Vikas Jain, co-founder and business director. “The market environment is not conducive right now for an IPO,” he added.
In an effort to encourage primary market issuances, Sebi has cut short the offer document approval time from 21-30 days to 10-12 days, said a second person among the four people cited above. “The condition of primary markets is a concern at Sebi. By speeding up the approval process, out of about 80 offer documents filed in the last six-seven months, Sebi has managed to clear about 70. Only a few applications have been pending, but that is also due to delay in response by the issuing companies’ merchant bankers,” the person said.
Top officials at three different foreign investment banking firms said the scope for Sebi is limited at the moment, and unless the economic and political situation improves, sentiment may continue to be subdued. The economy grew 5% in the year to March, the slowest in 10 years.
“Expediting the approval process will certainly help. But unless the economic situation improves and secondary markets stabilize, investor sentiment will not be back,” said Sanjay Sharma, managing director and head (equity capital markets-India) at Deutsche Equities India Pvt. Ltd.
Prithvi Haldea, managing director of Delhi-based primary market tracking firm Prime Database, said companies coming up with IPOs should offer some discount for retail investors.
“Primary market is indeed a follower of secondary markets, but pricing will be a key if bankers want primary market issuances to sail through,” he said. “Sebi’s faster approval will certainly help because often markets turn bad by the time Sebi clears the offer document.”
Sebi has been critical about unfair pricing of IPOs over the past year. In order to protect and attract investors in IPOs, the regulator had proposed a mandatory safety net mechanism under which retail investors could be refunded their subscription amount if the IPO stock fell more than 20% against broader markets within three months of listing. The proposal, however, is yet to be firmed up in the face of resistance from merchant bankers. Further, Sebi has simplified the disclosure format for public offer documents and has asked bankers to disclose their own track records in handling public issues.
“Bankers have to be logical about pricing of issues. Sebi has recently come across cases where private equity investors were issued shares at a price of, say, Rs.100 when the firm was unlisted and just after one year the same shares were offered to IPO investors at Rs.200. This trend cannot be accepted by Sebi,” said the person cited in the first instance.
Deepti Chaudhary and Ravindra Sonavane contributed to this story.