Sebi chairman backs better pricing disclosures in new-age IPO documents

Regulators “don’t want to dictate valuations” but the interests of retail investors putting money in initial public offerings (IPOs) must be protected, said Ajay Tyagi, chairman of the Securities and Exchange Board of India (Sebi).

A disclosure-based system and greater transparency by merchant bankers and issuers would improve trust in the system. It is time for the Association of Investment Bankers of India (AIBI) to review standards of due diligence merchant bankers adopt, he said on Wednesday.

“We do not want to dictate IPO valuations. But pricing is a critical issue and better explanation on the basis of which pricing is arrived in the offer document may be a good practice, especially for the new-age companies which are typically loss-making. These companies have their own ecosystem and their own capital structure, and it is important to educate investors about this,” Tyagi said at an event organised by AIBI on Wednesday.

Retail investors’ participation in the equity primary market has jumped. Until November this fiscal, the number of applications from retail investors in equity IPOs stood at 5.43 crore. During 2019-20, there were only 76.9 lakh applications and during FY21 there were 3.8 crore applications from these investors.

The average number of applications in retail category per IPO on the main board for 2019-20 and 2020-21 was 6.8 lakh and 13.64 lakh. This stands at 15.65 lakh for 2021-22. Investment by retail individual investors in IPOs has grown from about Rs 5,000 crore during 2019-20 to about Rs 8,300 crore during 2020-21 and to about Rs 15,100 crore till November 2021.

Information asymmetry will be higher in the primary than the secondary market. That is why Sebi had prescribed a 10 per cent ceiling for loss making companies hitting the market instead of 35 per cent for normal IPOs, Tyagi said.

The monitoring mechanism for tracking how the IPO proceeds are utilised is quite weak now and Sebi is in the process of strengthening it, Tyagi said. Sebi would soon take a call on increasing the lock in period for anchor investors as well.

“Fresh issuances have been significant and FPIs have been putting money in IPOs which shows faith in the India growth story.”

The IPO pipeline remains robust but the surge in Omicron cases, inflationary pressures and the possibility of the Fed increasing interest rates could remain the key headwinds for the IPO market, Tyagi said.

Tyagi said the processing time for clearing IPOs had been brought down and the regulator planned to reduce the time between the IPO and listing to 3 days from the existing six from the next financial year.

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