Transparency in IPO Pricing and ulitilsation of the IPO funds

With the recent public issues not giving much returns (though the market is bullish), I feel that the pricing is not proper. It has to be noted that the issues are subscribed fully and also by many number of times. It is not only the non-retailers, but also the retail investors subscribe more. All the IPOs were issued at a price band and almost all fixed the price at the highest price band. Adani Power came with a price band of Rs.90-100 and fixed the price at Rs.100. NHPC came with a price band of Rs.30-36 and fixed the price at Rs.36. Same is the case with Oil India. Both NHPC and Adani Power are quoting near or below their issue price. I am not looking at listing gains. But in the bull run, is it not fair to expect a share to quote above the issue price, given the fact that the issue is fully / over subscribed?

In a recent interview, on the NHPC and Adani Power IPO listings, Bhanshali (Chairman, Enam Securities) said that the dismal performance of the listings were being hyped, adding there was enough money on the market, he said, “if you have invested in the power sector, whose story is for 15 years, its fate cannot be decided in 15 days." (Source:

My observations:
  • If it is 15 years story, why the pricing is higher. Is the issuer playing with the investors money?
  • Does it mean that the investor is better positioned to value the IPO than the Lead Managers?
  • Why block your money in the IPO, when you can get it at a cheaper rate after listing?
  • In a bull run, if the shares cannot go up, it is clear that the price fixed for IPO is based on future earnings and not the current one.
The IPOs are rated by rating agencies. But what message is being sent? Let us see some of the recent IPOs and how it is being treated in the market.

If you see the last column, only few has a positive return (that too about 10%). Edserv returns 129% on IPO price, as the issue was done during the period when the market was down. So, when the market went up, it has given a good return to the investors!

The current practice of fixing the final price of an IPO is arrived at after the book building process. It is high time that a price regulation or transparency in pricing is being put in place. The price band is being advised by the Investment Banker, but the reason for such pricing is not disclosed to the investors. They just advise the IPO price on seeing the demand and the quantum of over-subscription.

Fine. Why people still look for IPOs and why the IPOs are over-subscribed? The answer is there are some genuine investors, who believes the IPO pricing and the others are greedy investors, who looks for listing gains. What is a listing gain? Normally, when an IPO is made, the shares (depending on the market sentiment) will be listed little higher than the IPO price. So, those who got the shares, will off-load to make gains, when listed. Nowadays, the listing gains are not that great. Again, depending upon the quantum of over-subscription, your application will be considered. If it is 3 times and you applied for 300 shares, you may get 100 shares (it will differ from case to case basis). So, you need to apply for (block also your money) 300 shares to get 100 shares. With the current market trend, I would rather wait and watch ! Buy after the shares are listed and decide on the quantum to buy. Look at the investor in Reliance Power!!!

Here is some good news. The Ministry of Corporate Affairs (MCA) and SEBI are working in tandem to make the IPO a transparent one. Following is an excerpt from a Press Trust of India release (Source: Business Standard). For full text, CLICK HERE
The Ministry of Corporate Affairs (MCA) is talking to market regulator Securities and Exchange Board of India (SEBI) for evolving guidelines for the price band for public offers by India Inc, to make the process transparent and ensure funds are not diverted.

Asked what steps government could take to prevent companies from fixing arbitrarily IPO (initial price offer) price band at a very high level, Minister for Corporate Affairs Salman Khurshid told PTI: “We are examining it. Some very good people with experience of capital markets are helping us on this. This is a matter in which we are in close consultation with Sebi... It will take 3-4 months, may be six months (to come out with the guidelines).”

On some kind of limits on fixation of price bands by companies, the minister said: “We are looking at how there can be greater objectivity and transparency... (when) we get the suggestions that we are seeking, (we) would narrow down the options.

Pointing out that misuse of money collected through IPOs was within the purview of MCA, he said: “That is something we are very careful about and keeping ourselves very alert... Early Warning System (being evolved by the MCA) will watch the misuse of IPO money.

Let us wait and watch what happens to Pipavav Shipyard, Euro Multivision and Thinksoft Global IPOs. Waiting to see a good measures from the MCA and SEBI for protecting the investors, so that their faith in the stock market is not lost.



Anonymous said...

Dear Sir, would you be discussing the upcoming IPOs and advise us on whether to invest or not, with your vast experience. It would be of great help to people like me, who get foxed by the advertisements and market rumours. Regards, Ravi

Gopal Ramanan on Oct 5, 2009, 8:59:00 PM said...

Hello Ravi, It is not my intent to discuss the IPOs, but if it is interesting, I will sure write on that. Again, I am not an investment consultant. There are various sites, which analyse the IPOs (, etc.,) My idea here is to spread the market awareness to those who want to get into that.

You can write to, if you have any questions.

Cheers, Gopal

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