Sebi chairman backs better pricing disclosures in new-age IPO documents

Pricing is a 'critical issue' for upcoming companies and small investors must be protected when they back them, says Ajay Tyagi.

The Securities and Exchange Board of India (Sebi) Chairman Ajay Tyagi said it is important to protect the interests of retail investors putting money into initial public offerings (IPOs).

Tyagi said a disclosure-based system and greater transparency from merchant bankers and issuers will help improve the trust in the system. He said this may be a good time for the Association of Investment Bankers of India (AIBI) to review the standards of due diligence adopted by merchant bankers.

“We do not want to dictate IPO valuations. But pricing is critical. Better explanation on the basis of which pricing is arrived at in the offer document may be a good practice, especially for new-age companies that are typically loss-making,” said Tyagi at an event by AIBI on Wednesday.

New-age technology companies, such as Zomato, Nykaa, and Paytm, went public this year. The sharp fall in the share price of Paytm after listing, however, drew a lot of criticism on social media and put the spotlight on the valuations these companies were seeking.

Participation by retail investors in the equity primary market has witnessed a significant jump. Up to November, the number of applications from retail investors in equity IPOs stood at 54.3 million. In 2019-20 (FY20), there were only 7.69 million applications; in 2020-21 (FY21), there were 38 million applications.

The average number of applications in the retail category per IPO for FY20 and FY21 was 680,000 and 1.36 million, respectively. This stands at 1.56 million for 2021-22. 

Investment by retail individual investors in IPOs has grown from Rs 5,000 crore in FY20 to Rs 8,300 crore in FY21 and to Rs 15,100 crore till November.

The problem of information asymmetry will be higher in the primary. Which is why Sebi had prescribed a 10 per cent ceiling for loss-making firms hitting the market, instead of 35 per cent for normal IPOs.