Sebi raps i-bankers for IPO pricing, due diligence
Sinha equates investment bankers with unfaithful match makers, says their credibility is at stake
Capital markets regulator, the Securities and Exchange Board of India (Sebi), today pulled up investment bankers for the poor performance of stocks post-listing and the unsatisfactory due diligence of companies entering the market through initial public offerings (IPOs).
Speaking at the Association of Investment Bankers (AIBI) Summit 2012, Sebi Chairman U K Sinha said the investment banking fraternity’s credibility is at stake as over two-third of companies that have listed since 2008 are trading below their issue prices even after factoring in the general market decline.
According to Sebi data, out of 117 companies that listed between April 2008 to March 2012, only 42 are trading above their issue prices, while 72 are considerably below their issue prices.
“The Indian investor, especially the retail investor, is thoroughly confused on what to expect from the primary market,” said Sinha. “We have to make very serious attempts to revive investor confidence. Obviously, some amount of introspection is required.”
Sinha drew parallels between investment banking and match-making businesses. I would like to compare your industry with the traditional match-making industry. The match maker goes out and tries to sell all the good qualities for bride,” he said.
“Whether the bride is ready or is a young child, doesn’t matter to the match maker. He makes forecast even when the child is not ready. Are we doing the same things with companies that are not ready?” Sinha asked.
While speaking on false disclosures made by issuers in the offer documents, Sinha said, “I have seen the match-makers talking about a bride or groom’s father having 20 acres of land, but he actually has (only) five acres. Matchmakers say there are 20 tractors when there is only one.”
According to the Sebi chief, investors will soon start deserting the market if the investment bankers let such artificial claims made by companies go unchecked.
Obviously, the investment bankers present at the event were not enthused. “It is not right comparing us to match makers. When the IPO goes through successfully, it means that there were investors who were willing to pay that price. There are so many listed stocks which underperform the markets, why just single out IPOs,” said an investment banker, who is also part the industry body AIBI.
Prithvi Haldea, managing director of Prime Database, said that by comparing investment bankers to match makers, Sinha wanted to highlight the importance of due diligence. “An investment banker has to do proper due diligence and check the credential of promoters before they bring it to the market.”
While Sinha spoke about matchmaking, his colleague V S Sundaresan, a chief general manager with Sebi, likened delisting to divorce. “Delisting is like a forced divorce. The investor has every right to ask what is due for him. If you are able to pay, go for divorce. If you are not able to pay, remain listed,” he said. Sundaresan said the regulator constantly gets feedback to change the reverse book building (RBB) process, which is used by companies for delisting, as it is a costly affair for companies. In FY11, out of the 22 companies that attempted delisting, 18 were successful. This means that there is nothing wrong in the system, said Sundaresan.