SEBI may weigh an alternative system for IPO pricing

MUMBAI: While the dismal performance of IPOs is largely attributed to a sluggish market, it is time to raise a more fundamental question: do we need a relook at the book-building system that’s used to price new stock offerings?

A review of the present book-building norms should figure in Sebi’s agenda on the next round of primary market reforms. According to a source familiar with the subject, Sebi may soon examine whether the book-building process is the most efficient price-discovery mechanism.

“In fixed price issues, the promoter fixes a single price. In the book-building issues too, he sets the issue price, though within a 20% band. So in the true sense, the market is not discovering the price,” said Prime Database MD Prithvi Haldea.

A predominant number of book-build IPOs gets subscribed (often in multiples) at the upper price band. It’s a reflection that almost all IPOs are underpriced, and rarely rightly priced. Stock market circles who favour a change in the rules argue that a real price discovery is possible only when there is no price indication from the issuer, and the price is freely determined through an auction. In such a system, one can have a circuit filter on the day of listing, as the real price discovery has already happened through the auction process.


But the challenge in any new system would be taking care of the interest of retail investors. To ensure this, the QIB portion of 50% in an IPO could be sold through a closed book auction. “The auction should remain open for a day. An auction shall help the issuer get the best price for the shares from QIBs. And then, the lowest QIB bid should be the fixed price for retail investors,” added Mr Haldea.

The logic is since QIBs are sophisticated investors with a better understanding of valuations, they don’t need an indicative price range for an IPO. Some of the investment bankers also think that retail investors (who don’t really help in the price discovery system) should be brought in at a later stage.

According to Kotak Mahindra Capital senior V-P Gesu Kaushal, “Over the last few years, many companies have successfully done IPOs through the book-building mechanism. We could consider having an indicative price band as a variation to the current book-building process given the volatile market conditions.

And over the longer term, as the market matures further, we could consider the French auction process for QIBs with a common clearing price for retail investors.” “Modifications are required on these counts. Also, in the extant process, the need of the hour is to reduce the time between deciding the price band and opening the issue for subscription,” said another senior i-banker.

Mr Haldea felt there was also a problem when several QIBs did not get shares in an IPO despite their willingness to pay a higher price. “Even if a QIB sees a higher value in an IPO, it still has to bid within the price band and be subjected to a uniform proportionate allotment,” he said.
thanks to :-/economictimes.indiatimes.com/