Take out retail investors to solve IPO pricing problem | business | Hindustan Times
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Take out retail investors to solve IPO pricing problem

SEBI Chairman C.B. Bhave said a couple of days ago that IPOs were failing to get good response because promoters were being greedy and investment managers were pricing issues too high. The problem of IPO pricing has now been commented upon on and off for a long time.

business Updated: Sep 27, 2010 21:04 IST

SEBI Chairman C.B. Bhave said a couple of days ago that IPOs were failing to get good response because promoters were being greedy and investment managers were pricing issues too high. The problem of IPO pricing has now been commented upon on and off for a long time.

About a year ago, Company Affairs Minister Salman Khursheed had said the government is examining the issue of companies setting IPO prices too high and plans to come out with a set of guidelines on fixing a price band of IPOs.

This is a market in which there are sellers (manufacturers and their advisors) and there are buyers. The operative word here is market. If a product isn’t selling, then that’s a problem that is obviously to be fixed by the sellers.

There’s something wrong with the price or the product itself or perhaps even the message that the buyer is getting about the product. It can’t possibly be the buyers’ fault, as petulant statements from the some sellers seem to suggest. Since this is a market, by definition the buyer is always right. However, promoters and other existing shareholders also have a right to get as much as possible from the new shareholders.

These forces have generally been in balance, with the pendulum swinging one way or the other depending on the way the stock market has been doing on the whole. Throughout the last couple of years, the IPO investor has actually proven to be quite sensible about what he is doing.

The problem only arises when we start making two assumptions: a) the small individual retail investor should be investing in IPOs and b) when he does so then he has a right to make a good profit.

Drop these two myths and all problems go away. IPOs are just a different method of buying stock that, despite the mythology, actually makes it more difficult to make money. It’s less suitable for the retail investor because typically, the company’s business success is either in the distant future, or it has spent a much shorter time in public scrutiny. The quality of information and analyses available on stocks is actually better in the secondary market.

The problem of IPO pricing disappears when we take retail investors out of the equation. IPOs are ideally meant for institutional investors who can do appropriate research and who can properly evaluate the track record of the promoter and the investment banker.