The Securities and Exchange Board of India (SEBI) has started giving a sign-off on the pricing of initial public offerings – an approval that was not required until some months ago.
This assumes significance as IPO pricing is one of the important aspects that can influence a company’s post-listing performance and can often go haywire in a buoyant market such as the one seen this year.
“The regulator now gives a soft sign-off on the price band of the offerings. They try and understand if the pricing is more or less in line with the listed peers,” said a senior banker.
So, if the listed peers are trading at 20-30 times price to earnings multiples for the previous financial year it should not be that the company that is being taken public is trading at 50-60 times, said the banker. Or if a private equity transaction six months back valued the company at ₹8,000 crore, you cannot come to the market with a valuation of ₹30,000 crore.
Onus with bankers
Having said that, the onus is still with the bankers to price the issue the way they want to, and the regulator will not get into the finer details of how the company has been valued, the banker said.
Valuation of an IPO-bound company depends on several other factors that includes past financial performance, its future growth potential, demand for its shares during roadshows and market conditions.
“The regulator, in general, does not provide any inputs on the pricing. The sign-off is more of an operational step that extends the approval process by a day or two. As of now, it makes no difference to how the pricing is being done,” said another banker familiar with the matter.
The regulator, however, does ensure that the key risks are well-articulated in the draft prospectus so that investors can make an informed decision, he added.
‘A major step’
“If the regulator changes the yardstick for approving the pricing, it will be a major step. But any further tightening will be a regulatory overreach as SEBI has no mandate to dictate pricing. It can only ask the bankers to highlight where the risks may emerge,” he said.
An email sent to SEBI did not immediately get a response.
SEBI has maintained a stance that it will not interfere with the pricing and valuations of an offering. However, if there is a wide variance in the IPO price with that of the price quoted in the pre-IPO placement or in an earlier transaction, the issuer must disclose the reasons for the same.
According to reports earlier this year, SEBI was not comfortable with selling shareholders of IPO-bound companies getting involved in pricing the IPO for fear that they could exert an undue influence on the pricing to the detriment of investors.
Investors have made money from the majority of listings this year, with 55 of the 69 companies that made a debut ending with gains on the first day, hinting at less-aggressive pricing.
Foreign portfolio investors sold shares worth over ₹1.14 lakh crore in the cash market in October but invested ₹19,842 crore in the primary market. This is because while primary market issuances were mostly priced at fair valuations, the benchmark indices were trading at elevated valuations, VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.
Pointers:
Hands-off approach
* SEBI nod required on price-band of IPOs
* Pricing has to be aligned with listed peers
* Bankers still free to decide on the valuations
* IPO valuations a function of financial metrics, past deals, growth potential, investor response and market conditions
* Aggressive pricing can impact a company’s post-listing performance