Govt examining IPO price band: Khurshid

The government is talking to market regulator Sebi for evolving guidelines for price band for public offers by India Inc to make the process transparent and ensure funds are not diverted.

Asked what steps government could take to prevent companies from fixing arbitrarily IPO price band at a very high level, Corporate Affairs Minister Salman Khurshid said, "We are examining it, some very good people with experience of capital market are helping us on this.

"This is a matter in which we are in close consultation with Sebi...It will take 3-4 months, may be six months (to come out with the guidelines)."

On some kind of limits on fixation of price bands by companies, the Minister said: "We are looking at how there can be greater objectivity and transparency... (when) we get the suggestions that we are seeking, (we) would narrow down the options."

Pointing out that misuse of money collected through IPOs was within the purview of Corporate Affairs Ministry, he said "that is something we are very careful about and keeping ourselves very alert...Early Warning System (being evolved by the MCA) will watch the misuse of IPO money."

As per the current practice, the final price of IPO is arrived after a book-building process, the base for the same is the price band that is announced by the companies before the start of the public issue bidding process.

In absence of any guidelines, companies raising funds from the public through IPOs fix the offer price on their own depending on their perception of the demand for shares and appetite of the market.

Sometimes, to the detriment of investors, the shares are listed at below the offer price causing loss to them.

The price band is generally suggested by the investment bankers to the companies, but reasons for the same are not disclosed, except for the cases where pre-IPO private placements take place.

With the stock market picking up, several companies, including real estate firms Emaar MGF and Sahara Prime City, have filed their draft prospectus with the Securities and Exchange Board of India (Sebi) and will be coming out with their initial public offers (IPOs).

In the past, shares of many companies have subsequently dropped below the issue price or the IPO price band once the trading starts in them at the bourses. In some cases, the shares have dropped below the IPO price in the first day of trading itself.

In January 2008, Reliance Power came out with the country's biggest ever IPO where it sold shares at a price of Rs 450 per share, but the shares fell to as low as Rs 372 in the first trading day itself. Currently, the shares are trading near Rs 166 a piece.

Earlier this year, PSU power company NHPC sold shares at a price of Rs 36 a piece, but within a week it slid to below the issue price and is currently trading near Rs 34 a piece.