20-May-2022
In a speech in February, the then Securities and Exchange Board of India Chairman, Ajay Tyagi, remarked that the appropriateness of valuation of new-age, loss-making companies coming out with initial public offerings was being debated intensely among stakeholders.
These debates appear to have picked up pace in recent weeks with the IPO frenzy fizzling out in line with the fall in secondary market equity indices.
Even in the case of the large IPO of Life Insurance Corp of India, the government had to bring down the valuation in order for the issue to scrape through.
The post-issue share performance of recent high-profile IPOs such as Zomato and Paytm have disappointed retail investors.
A report in Mint on Wednesday said that SEBI was currently having internal discussions on why recent high-profile IPOs were trading below their issue price. It said that SEBI was also telling IPO aspirants to reconsider their valuations.
Over the last one year, the stock market regulator has strengthened the disclosure requirements by companies in their red herring prospectuses for IPOs, and also tweaked other norms around exit of large shareholders through the offer for sale route.
These changes have mostly focused on the new-age companies.
The debate inside SEBI on IPO valuations is fine but the fact that they are high is known to investors, including the retail and other individual investors. Even anchor investors who are qualified institutional buyers and for whom a portion of the IPO is reserved are not oblivious to it.
The problem is not that of lack of awareness.
Investors, of all size, are flush with funds to invest and desperate for quick returns from listing gains.
For investors, with not enough funds to subscribe into IPOs, brokerage houses and non-banking finance companies have supplied easy money.
The IPO market started heating up in the middle of 2020. Since the liquidity in the investment ecosystem was near all-time highs at that time the issues were getting subscribed in high multiples and also delivering significant listing gains.
Investment bankers took advantage of this and prodded unlisted companies and their private equity investors to cash in on the IPO boom.
Ultra-short term return-hunting traders are always on the prowl in secondary market trading on the stock exchanges. During periods of primary market boom they get another market to play in.
Retail investors are lured by the promise of high and quick returns.
These factors have played out in IPOs in the last 18 months.
SEBI has done everything in its capacity to improve measures at the level of disclosures on corporate fundamentals. But it has stopped short of measures to control leverage and liquidity in IPO subscriptions.
SEBI must explore measures to curb recklessness in IPO financing by brokers and NBFCs. Such financing is also seen in the pre-listing IPO grey market.
The leverage available to ultra-short term investors is substantially high. The market regulator will not hurt anyone if this is tempered.
Further, the rush for returns has its own rolling mass effect. Retail investors subscribe to IPOs in larger quantity in order to improve their chances of getting allotment and this feeds on itself leading to higher over-subscription multiples.
SEBI must, therefore, review the allotment process to deter such frantic investments. If there is a way to assure a minimum level of allotment to each subscriber it must be quickly implemented.
SEBI must also consider extending the lock-in period for anchor investors. Their subscription in an IPO, before it opens for public investors, has bearing on the latter.
A longer lock-in period will indicate that anchor investors are committed for a longer time and that will provide a better signalling effect at the time of IPO.
Usually, regulators avoid fiddling with valuations in the market. The market must be let free to decide. The demand-supply dynamics may not always be what the regulator wants.
Any fizzling out of issues in the primary market ought not to be the regulator’s worry. Markets ebb and flow. It is a natural cycle.
The market regulator must only ensure that the
processes that grease the market ecosystem are not gamed and manipulated.
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