Will track record of merchant banker help?

Sebi has put the ball in investment bankers' court to ensure retail investors do not get duped

“When two-thirds of the initial public offerings (IPO) in the last three years are trading below their benchmark indices, there is something wrong…” This is the strong argument of U K Sinha, chairman, Securities and Exchange Board of India (Sebi).

To counter this, Sebi has put in place tough guidelines, such as making it mandatory for merchant bankers to provide their track record along with the IPO prospectus. The question is — will it help investors?

In the physical draft red herring prospectus (DRHP), you will see that each of the merchant bankers to the issue will have a table with the data of the share price movements post-listing on various days. If you see this data online, you will see data of not just the share price but of the public issue itself, financials of the issuer companies that the merchant banker has handled, usage of issue funds and so on.

Prithvi Haldea, chairman and managing director of Prime Database says this data is just confusing for the retail investor and is not of much use to them. “The price movements of public issues will always depend on market conditions. The track record per se is under dispute because the merchant banker cannot be held responsible if the stock falls due to bad market conditions. The track record data does not serve the purpose of guiding retail investors’ in decision making.”

In fact, he goes a step further and says the only beneficiary could be that some merchant bankers who have a good track record may be able to persuade the issuer company to accept the price that they have decided upon. Even Investor Grievances Forum Vice-president, Hinesh Doshi, says the feedback they have is that the data is not helping people much.

But is it about only merchant bankers? By the same argument, should the investor be looking at fund managers, or for that matter, historical data of mutual fund schemes before investing? In case of mutual funds, the fund house clearly has to give a statement that “past performance is not an indicator of future performance”.

And, there is little guarantee that even if the merchant banker is good, the issue should do well. Take the example of Bharti Infratel. The issue was managed by 14 merchant bankers! How did the issue fare? The issue was subscribed 1.3 times and the retail portion received bids for just six per cent of the shares.

The answer could lie in a safety net, a proposal that Sebi is considering. But again, proponents of free market would argue that equity investing, by itself, is risk capital. So, there is no reason for retail investors to get protection from market dynamics.

The answer lies somewhere in between. Using Sinha’s words, “Merchant bankers have been empowered to ensure that companies don’t cheat investors.” He feels strong deterrents are better than punishment. The ball is in the merchant bankers’ court to ensure that investors do not get duped.