Few days back, I had an interesting conversation with Securities and Exchange Board of India (Sebi) Chairman UK Sinha about how the initial public offering (IPO) market in India has been cleaned up. Although much of the conversation is specific to mutual funds, he touched upon some topics of interest to equity investors too.
One particularly enlightening part of the conversation was about the evolution of the Indian (IPO) market.
The IPO boom
The Indian equity markets are in the midst of an IPO boom. In terms of numbers, the previous year (2015-16) saw Rs 34,322 crore of IPOs, and 2014-15 had Rs 29,716 crore of IPOs. Both these numbers are substantially higher than the Rs 15,234 crore of 2013-14.
However, the real change is that this boom not so much quantitative, but qualitative. There’s a new transparency, and a genuinely high standard of information available for the investor. As a result, investors have fewer nasty surprises when they invest in IPOs.
Quality across spectrum
These changes are visible not only in the large, high profile issues that are intensively studied and analysed, but all across the board. Historically, the Indian IPO bazaar has had a handful of big issues at the top and a large mass of shady ones at the bottom. That’s not to say that large, high profile issues can’t be shady, but that’s a separate story for another day. The average issue size nowadays is of the order of Rs 600 to 700 crore. This is literally hundred times larger than it used to be in the heydey of IPO rackets of the 90s, and about two to three times larger than in about a decade back. Generally speaking, there are fewer, larger issues today.
However, smaller numbers and higher amounts alone do not ensure quality. An important role has been played by a range of measures that Sebi has taken.
Whip on merhant banks
The biggest has been that Sebi has explicitly recognised and acted upon the centrality of stern regulation of merchant bankers in the process. Throughout the history of the Indian equity markets, all fly-by-night, unethical and shady activities have been conducted by merchant bankers hired by promoters to do so.
As the Sebi chairman himself said, merchant bankers used to take contracts to raise money for promoters (and not companies) and run opening day price-fixing. The key part of fixing this problem has been the strategy of going after merchant bankers rather than promoters.
After all, there can be fly-by-night promoters but no fly-by-night merchant bankers. The latter have to be registered with Sebi, and need to continue doing business.
The key change that Sebi has brought about is to insist on an elaborate due diligence which follows a certain fix processed, along with extensive transparency about the merchant banker’s track record in the prospectus of a public issue. On top of that, the key information in the prospectus has become easy to understand and absorb because the regulator has also created an abridged 10-page format.
Elimination of wild swings
Wild swings on the listing day of an IPO have all been eliminated by having a day for call-option bidding on the day before an issue opens. This separates the wheat from the chaff, and gives a clear indication of the demand for the stock at realistic prices. Along with earlier measures like ASBA (Applications Supported by Blocked Amount), the Indian IPO market has become much cleaner and much friendlier to the investor, specially the individual investor.
Concerns still persist
Does all this mean that we at Value Research have given up on our long-established opposition to IPO investing? Not really. We firmly believe that it doesn’t make sense for individual investors to invest in IPOs. If anything, compared to listed stocks, IPOs are actually less suitable for such investors.
Despite all these reforms, IPO companies are not understood as well as listed companies. The balance of power (in the sense of information being power) still lies with the seller. Let institutions dabble with IPOs, you and I should focus on stocks which we know inside out.
One particularly enlightening part of the conversation was about the evolution of the Indian (IPO) market.
The IPO boom
The Indian equity markets are in the midst of an IPO boom. In terms of numbers, the previous year (2015-16) saw Rs 34,322 crore of IPOs, and 2014-15 had Rs 29,716 crore of IPOs. Both these numbers are substantially higher than the Rs 15,234 crore of 2013-14.
However, the real change is that this boom not so much quantitative, but qualitative. There’s a new transparency, and a genuinely high standard of information available for the investor. As a result, investors have fewer nasty surprises when they invest in IPOs.
Quality across spectrum
These changes are visible not only in the large, high profile issues that are intensively studied and analysed, but all across the board. Historically, the Indian IPO bazaar has had a handful of big issues at the top and a large mass of shady ones at the bottom. That’s not to say that large, high profile issues can’t be shady, but that’s a separate story for another day. The average issue size nowadays is of the order of Rs 600 to 700 crore. This is literally hundred times larger than it used to be in the heydey of IPO rackets of the 90s, and about two to three times larger than in about a decade back. Generally speaking, there are fewer, larger issues today.
However, smaller numbers and higher amounts alone do not ensure quality. An important role has been played by a range of measures that Sebi has taken.
Whip on merhant banks
The biggest has been that Sebi has explicitly recognised and acted upon the centrality of stern regulation of merchant bankers in the process. Throughout the history of the Indian equity markets, all fly-by-night, unethical and shady activities have been conducted by merchant bankers hired by promoters to do so.
As the Sebi chairman himself said, merchant bankers used to take contracts to raise money for promoters (and not companies) and run opening day price-fixing. The key part of fixing this problem has been the strategy of going after merchant bankers rather than promoters.
After all, there can be fly-by-night promoters but no fly-by-night merchant bankers. The latter have to be registered with Sebi, and need to continue doing business.
The key change that Sebi has brought about is to insist on an elaborate due diligence which follows a certain fix processed, along with extensive transparency about the merchant banker’s track record in the prospectus of a public issue. On top of that, the key information in the prospectus has become easy to understand and absorb because the regulator has also created an abridged 10-page format.
Elimination of wild swings
Wild swings on the listing day of an IPO have all been eliminated by having a day for call-option bidding on the day before an issue opens. This separates the wheat from the chaff, and gives a clear indication of the demand for the stock at realistic prices. Along with earlier measures like ASBA (Applications Supported by Blocked Amount), the Indian IPO market has become much cleaner and much friendlier to the investor, specially the individual investor.
Concerns still persist
Does all this mean that we at Value Research have given up on our long-established opposition to IPO investing? Not really. We firmly believe that it doesn’t make sense for individual investors to invest in IPOs. If anything, compared to listed stocks, IPOs are actually less suitable for such investors.
Despite all these reforms, IPO companies are not understood as well as listed companies. The balance of power (in the sense of information being power) still lies with the seller. Let institutions dabble with IPOs, you and I should focus on stocks which we know inside out.
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