The Securities and Exchange Board of India (Sebi) has warned investment bankers that if they continue with their aggressive pricing approach in initial public offers (IPOs), then it would be forced to come out with a framework to regulate IPO pricing.
According to persons familiar with the development, the regulator is miffed that a majority of the IPOs are still trading below their issue price even though the markets have recovered significantly.
Sources said the regulator has made the investment banking community aware of its concerns and has told them to behave in a more reasonable and logical manner when it comes to pricing of public issues. The current regulations related to IPOs do not touch upon the issue of pricing and, instead, focus on the disclosures and due diligence process to be followed by bankers.
?The safety net is the first step in that direction,? said a person privy to the development. ?Sebi will first see the change in approach (of investment bankers) post the safety net mechanism is implemented. If it feels that it is being triggered on a regular basis, then it could look at laying down broad modality related to IPO pricing,? he explained on conditions of anonymity.
Sebi chairman UK Sinha has already clarified that safety net will only be a ?mild solution? to ?put some pressure in the minds of promoters and advisors on pricing?. Safety net refers to a mechanism wherein issuers will have to buy back shares from retail investors if the share price falls more than 20% from the issue price within three months from listing.
Last week, at a seminar organised by the Association of Investment Bankers of India (AIBI), Sinha criticised the investment banking fraternity for acting in a manner that has proved detrimental to the interest of the retail investors. He blamed bankers for the fact that bulk of public offers are currently trading below the issue price.
?Let us also introspect that are we behaving in a (proper) manner… People will start questioning… merit-based versus price fixed by regulator or the company,? said Sinha. According to a Sebi analysis, there were 117 issues between 2008-09 and 2011-12 out of which 72 issues are trading not only below the issue price, but also below the price after adjusting for market decline.
This is not the first time that Sebi has taken a stern stance against investment bankers. It tightened the regulations related to due diligence of IPO-bound companies while making it mandatory for bankers to disclose their track record in the draft document of IPOs.
?When we started asking on matters like due diligence and that the complete track record (of the banker) needs to be maintained for inspection by Sebi officials, there was huge resistance and people thought that we were trying to be too intrusive,? Sinha said last week.
