Sebi goes easy on IPO pricing

IndiGo, Coffee Day offers point to change in approach towards pricing, as compared to 2 years earlier; hand-holding of retail investors not deemed necessary

In May 2013, when online local listings agency Just Dial had an Initial Public Offering (IPO), it was forced by the Securities and Exchange Board of India (Sebi) to offer a discount and ‘safety net’ to retail investors.

The stock markets regulator felt the valuations sought by Just Dial, one of the very few new-age information technology companies to tap the stock domestic market, were on the higher side for a company which hadn’t turned profitable.

Just Dial’s Rs 900-crore IPO was subscribed 10 times what was on offer and its stock saw significant gain on listing. The safety net option, where the issuer has to compensate investors if the stock falls below the IPO price, was never triggered. Come October 2015 and Coffee Day Enterprises, the company that operates the Café Coffee Day chain of restaurants, and InterGlobe Aviation, the company that owns IndiGo, the country’s most profitable airline, didn’t face any such pressure from the regulator in pricing their offers. Neither issue had a sop for small investors such as a discount to the issue price.

Investment bankers and primary market experts said Sebi had changed its approach to IPOs. “Earlier, Sebi tried to exercise some pricing control. The regulator has now reached a conclusion that there is no need to interfere in IPO pricing,” said Prithvi Haldea, chairman, Prime Database, a primary market tracker.

Market players said between 2011 and 2012, most IPOs that came to the market saw significant erosion in their value after listing, forcing the regulator to intervene. The post-listing performance for IPOs since 2014 has been decent, due to a revival in the secondary market. This has made the regulator step back, said experts.

“Gone are the days when you had to hand-hold the retail investor. The regulator and the market has come to terms with the fact that equity is a risk instrument and investors cannot be compensated in an event of loss,” said an investment banker, who managed the InterGlobe IPO, asking not to be named.

Though Sebi’s fresh approach has been hailed by investment bankers, some believe this is impacting retail participation in IPOs. “Coffee Day and IndiGo were both marquee issues. Both IPOs saw tepid demand from retail investors, as they were asking for much more than the fair price. This is not a conducive sign for the primary market,” said Arun Kejriwal, a director at Kejriwal Research and Investment.

Experts believe both the Coffee Day Enterprises and InterGlobe IPOs were priced aggressively as bankers had investment commitments from institutional investors. The retail portion in both saw barely full subscription, as investors saw little gains on listing.

“Fair pricing of IPOs is critical, so that investors are incentivised to invest in IPOs. However, IPOs cannot be always so priced that investors make a quick buck and exit on the listing day,” said the banker quoted earlier.