AK-Nomics: Will the regulator bell the primary cat

Barring the odd one, almost every IPO’s price has got fixed at the upper end of the price band, writes Ashok Kumar.

Last week, we looked back in time at 2005, when SEBI initiated a slew of primary market initiatives that have, in hindsight served its purpose. As promised, this week, let us attempt to crystal gaze into the future.

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For a while now, there has been a buzz that an auction-based method for pricing IPOs may replace the prevalent book-building system. This initiative could be prompted by the sharp increase in pre-IPO share placements. Over the last couple of years, most companies hitting the capital market have made a private placement just ahead of the IPO.

Now, this could have been par for the course, except that it has normally happened too close to the announcement of the IPO and that too at a price substantially lower than the one on offer to retail investors. If the issuer is constrained by market conditions to drop the IPO price, a pre-IPO bonus has invariably followed to ensure that the institutional investor does not lose out on the price front. Alas, no such comfort is on offer for retail investors.

Furthermore, there is a school of thought that book-building, which was introduced in India in the late-1990’s as an alternative to fixed pricing, has not yielded the desired results. Barring the odd one, almost every IPO’s price has got fixed at the upper end of the price band. What’s more, most issues have also listed at a decent premium leading the promoter to feel short-changed in terms of pricing. The fact that even fundamentally shaky companies have been listing well, however suggests that some of the blame or even credit, depending on the way one looks at it, must lie at the door of the ‘premium or grey’ market and its operators.

Under an auction system for pricing IPOs, generally, investors would be asked to indicate the price and number of shares they wish to buy. The issuer will then allocate certain shares in descending order of prices till the amount of shares to be issued is exhausted. The lowest bid price at that point is accepted as the deemed price and investors pay this price.

In the event of case of the IPO being oversubscribed, allocation would be done on a pro-rata basis. There are, of course, alternative methods of pricing IPOs through an auction system, but the above-mentioned one could be the likeliest to be used in the Indian market, at least, for now.

Yet another initiative being spoken of is, hiking the down-payment amount for IPO investments by institutional investors (QIBs) to 25 per cent from the present level of 10per cent.

If this does happen, and I believe it should, we might see a repeat of 2005, when merchant bankers and institutional investors cried blue murder for a while, but soon reconciled to the harsh reality that, it costs, to participate in the ‘India growth story’ which they, so often wax eloquent about.

Spare a thought here for the beleaguered retail investor, whose chances of fair allotment are hampered by SEBI’s inability to flush out the ‘IPO scam’ culprits, many of whom are also ‘grey market’ operators. That the retail investor still pays 100 per cent upfront while applying for an IPO itself suggest the need for a more ‘level playing field’.

SEBI did a good job with primary market reforms in 2005. Can it do an encore in 2007 ? Many primary market participants hope so, just as their secondary market contemporaries conversely hope that our Hon’ble Finance Minister does not do a PN clarification encore.

The writer is CEO, Lotus Knowlwealth, a knowledge based consulting firm.