The Securities and Exchange Board of India (SEBI) has started signing off on the pricing of IPOs – an approval that was required only a few months ago.
This becomes important because IPO pricing is one of the important aspects that can impact a company’s post-listing performance and can often go haywire in a booming market like this year’s.
“The regulator now provides a soft definition of the price range of the offer. They are trying to understand whether the pricing is more or less in line with listed competitors,” said a senior banker.
So if the listed peers are trading at 20 to 30 times the previous financial year’s earnings multiples, the company going public should not be trading at 50 to 60 times, the banker said. Or if a private equity transaction six months ago valued the company at ₹8,000 crore, you cannot come to the market with a valuation of ₹30,000 crore.
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Point of contact for bankers
That said, the onus is still on the bankers to price the issue in the way they want, and the regulator doesn’t want to get into the finer details of how the company is valued, the banker said.
The valuation of a publicly traded company depends on several other factors, including its past financial performance, future growth potential, demand for its shares during roadshows and market conditions.
“The regulator generally does not provide any input on pricing. The signing is more of an operational step that extends the approval process by a day or two. At this point, it makes no difference how the pricing is done,” said another banker familiar with the matter.
However, the regulator will ensure that key risks are properly set out in the draft prospectus so that investors can make an informed decision, he added.
‘A big step’
“If the regulator changes the benchmark for approving prices, it will be a big step. But any further tightening will be a regulatory overreach as SEBI has no mandate to dictate prices. It can only ask the bankers to highlight where the risks could arise,” he said.
An email to SEBI received no immediate response.
SEBI has maintained its stance that it will not interfere with the pricing and valuations of an offering. However, if there is a significant difference between the IPO price and that of the price quoted at the time of the pre-IPO placement or in a previous transaction, the issuer must disclose the reasons for this.
According to reports earlier this year, SEBI was not comfortable selling off shareholders of IPO-bound companies who got involved in the IPO pricing, fearing that they could exert 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 debuted ending with profits on the first day, indicating less aggressive prices.
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 issues in the primary market were mostly priced at fair valuations, while the benchmark indices traded at higher valuations, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Directions:
Hands-off approach
*SEBI nod required on price band of IPOs
*Prices must be aligned with listed peers
* Bankers are still free to decide on valuations
* IPO valuations depend on financials, past deals, growth potential, investor reaction and market conditions
* Aggressive pricing can impact a company’s post-listing performance
