Blame market, not pricing, for IPO woes

Written by Ashley Coutinho | Ashley Coutinho | Updated: Nov 15 2011, 09:09am hrs
Stability is needed in the secondary market to revive primary issuances says Sanjay Sharma, head, equity capital markets, Deutsche Equities India and chairman, Association of Merchant Bankers of India. In an interview with Ashley Coutinho, he says while merchant bankers are blamed for aggressively pricing issues to the detriment of the primary market, the 2-3 week time period between which the IPO is marketed and listed could see totally different market conditions.

Its been a dull year for primary issuances. Do you see things improving going forward

It depends a lot on whats happens in Europe and the political situation back home. I dont see an immediate uptick right now. But over the next quarter we may see stability in the equity markets. However, the primary market may take a while to revive since unlike the international markets, we need a much longer period of stability in the secondary market before the primary market picks up.

Some of the recently listed companies have suffered significant erosion in their share prices. Where does the problem lie

Of course the prevailing market condition and volatility are some of the factors and changes in stock price of IPOs and the changes in price of listed stock in secondary markets are locked to each other. Given the market volatility, the view on the markets and the world could change in a matter of days of few weeks and the 2-3 week time period between marketing an IPO and listing could see totally different market conditions. We have been trying to reduce this time period and Sebi is looking at options. People also keep pointing towards aggressive pricing as one of the factors. But the point is that the fundamentals of the company dont change in a matter or 2-3 weeks. So, if investors were willing to buy at a particular price during an IPO, why should the situation change at the time of listing So apart from the fundamentals of the company, the demand and supply also determines the price of a stock on an ongoing basis.

Several small companies are finding it difficult to tap capital market. Why

Smaller companies not only find it difficult to raise capital from markets but also in ensuring enough liquidity post listing. The requirement of 50% of the issue being reserved for retail and HNI investors further reduces the amount available for institutional investors. This is important since most retail investors follow the institutional demand.

The government is set to miss its disinvestment target this year as well. What should the government do to narrow the shortfall

We have five months left this fiscal. Given that an IPO or an FPO are the only two modes of fund raising available, the government may not succeed in raising too much capital except from the issues, which have already been lined up with reasonable amount of documentation complete.

What are the challenges faced by the merchant banking industry at present

Owing to depressed market conditions, activity levels in the capital market is low. Logically in this scenario, M&A or private equity activity should be higher but thats not always the case either.

We are working with the regulator on policy issues. Sebi has already announced the simplification of IPO forms and looking at streamlining the disclosure requirements and the IPO process. AMBI is also working on preparing a due diligence manual, which will act as a guide for the merchant bankers.