The capital market regulator?s suggestion that investors be made familiar with the track record of merchant bankers, as part of an IPO prospectus, doesn?t seem to have gone down well with the fraternity. A recent newspaper report said investment bankers were opposed to the move, which was originally mooted late last year, especially since the format is to include the performance of the stocks post listing. Apparently, they believe that price movements of the stocks were ?irrelevant?. No one denies that market conditions do play an important role in how any stock performs. But the fact that so many of the IPOs that have hit the market over the last year or so are out of the money suggests that merchant bankers need to be more than just a post office service delivering shares from the company to investors.

Of the 239 IPOs, handled by the top 10 investment bankers since January 2007, just 82, or about a third of the total, are trading above their issue price. One is not expecting that stocks won?t fall when the market does and neither is one asking for these stocks to significantly outperform their respective benchmark indices, but the fact that two-thirds of the IPOs are out of the money is simply not acceptable. In fact, at one point, 70% of the issues that listed in 2010-11 were trading below their IPO prices and a fair number were quoting at a price 50% below the IPO price. So, clearly, there is something wrong with the way IPOs are being priced; indeed, most of them seem to be grossly overpriced. Take the case of Future Ventures India; despite promoters forking out R26 crore to prop up the stock, which debuted on the bourses on May 10, 2011, it failed to stay above the issue price of R10 per share for the first 10 sessions and even now trades at R8. Even the much-touted Muthoot Finance is now trading at R155 compared to its IPO price of R175. On the other hand, the Coal India stock, priced at R245, is still trading at R377. However, in the past, the government too has been guilty of mispricing stocks; follow on offers of NTPC and NMDC had to be bailed out by state-owned institutions and the NMDC stock performed poorly for a long time after the new shares listed.

The IPO market seems to have become one in which everyone?s looking for instant gratification; after the initial spurt on listing, the stock languishes. While promoters will do anything to get the best value for their stock, and equities are ultimately all about risk, it?s up to the regulator to see that small shareholders don?t get a raw deal. One doesn?t want to kill the market and neither does one want to go back to the days of the Controller of Capital Issues because that would be regressive. But a note on the performance of the merchant bankers tracking the share performance of the IPOs managed by them relative to the respective benchmark index, in the offer document, seems harmless. It will give the public some idea of how they have performed. In fact, it?s surprising that merchant bankers are being so defensive about having their resumes included in the offer documents, especially since they?re ever ready to share league tables that show how many issues they?ve managed and how big these were. If they believe they?ve been doing a good job, they should take on the challenge. The other thing that can be done to help investors gauge whether a company is worth investing in is to encourage independent research because, as Sebi has also pointed out, the prospectus contains too much information and virtually no perspective.

However, ultimately, retail investors will need to be far more circumspect while writing out a cheque and should stay away if unsure. Indeed, retail subscription has been thinning, as seen in many of the recent IPOs. For instance, the Galaxy Surfactants IPO was withdrawn after four days despite the merchant bankers having roped in anchor investors like ICICI Prudential Life and Goldman Sachs. Even a few months ago merchant bankers were flaunting anchor investors, who incidentally can sell the shares after a month, as a sign of how good the issue was. Sebi?s objective, while introducing the concept of anchor investors in mid-2009, was to help facilitate price discovery and reduce volatility on the day of listing. It would be interesting to know for how long these investors actually hold on to the shares, though it?s now evident that they don?t have too many followers.

That?s the good news. The bad news is that a dull IPO market is leading to some undesirable practices. A few days ago, Sebi held back the listing of Vaswani Industries, deciding to probe the issue, which was subscribed four times, and the price for which was fixed at R49 per share; the regulator is reportedly enquiring into whether the majority of the applicants could have been dummy investors, acting on behalf of a few big operators. The idea would be to give investors the impression that the issue is a popular one and subsequently withdraw applications after the book building process is over. To Sebi?s credit, it has cracked down quickly and the move should send a strong signal to the market. While investors may want to withdraw an application for genuine reasons, there has to be some way to stop misuse of such facilities. The last thing we need is a vitiated environment; as it is, retail investors are not enthused by the markets and unless Sebi keeps a close watch, more such scams could occur.

shobhana.subramanian@expressindia.com