Capital market regulator SEBI has advised merchant bankers to be “realistic” about setting the valuations of large IPOs.
Speaking at an event, organised by Merchants’ Chamber of Commerce & Industry (MCCI), in Kolkata on Tuesday, SEBI whole time member Kamlesh Chandra Varshney said the “valuation aspect” of large initial public offerings (IPOs) is very important as it is important to ensure that retail investors do not lose trust in the capital market, which should remain resilient and growth oriented.
“When companies tap the capital market or trading is carried out in the capital market, the most important part is that there must be a trust, because trust is something which will build long-term relationship and lead to sustainable growth in the long-term.. .issue is what should be the valuation (of IPOs)? There are concerns that some companies do high valuation and post listing their price go down,” Varshney said.
“We at SEBI don’t control the pricing aspect. That pricing aspect is determined by anchor investors and merchant bankers. Anchor investors also include mutual funds. Where do they get their money? Most of the money is of retail investors. So now, if mutual funds are also investing money in IPOs at a high valuation, it is retail investors also who will lose money in future. Now that is one aspect that we tell merchant bankers and anchor investors to be careful about, because it is a market dynamics. We don’t want to interfere in market dynamics,” he pointed out.
Training for DRHP
Varshney said the regulator is having a training session for merchant bankers, who prepare Draft Red Herring Prospectus (DRHP) papers for companies which want to go public. “If they are fully transparent in the first place, we don’t have to issue any observations. So we will also be training these merchant bankers that what we have noticed in your DRHP that you are not disclosing these and these information,” he stated.
Notably, SEBI has earlier this month proposed relaxing the minimum public offer requirements for very large companies, while also extending the timelines for them to meet minimum public shareholding norms.
The proposed framework, if implemented, aims to ease the immediate dilution burden on issuers, while still ensuring gradual compliance with public shareholding requirements.
As part of this approach, SEBI has suggested retaining the retail quota at 35 per cent, in line with the existing regulations. Instead of reducing retail participation, the regulator is looking to address issuer concerns by amending rules related to minimum public offer thresholds.
This marks a shift from its earlier consultation paper, issued on July 31, which had proposed cutting the retail quota for IPOs above ₹5,000 crore from 35 per cent to 25 per cent, citing difficulties faced by issuers in managing large issues.
In its consultation paper, SEBI noted that very large issuers often struggle to dilute substantial stakes through an IPO, as the market may not be able to absorb such a large supply of shares.
On the consultation paper, Varshney said, “The idea is how do we facilitate large IPOs to come out and tap the capital market. Now it is not intended to benefit any one particular IPO. It is a general reform in the capital market.”
“This consultation paper is in the public domain. We are awaiting the comments from all stakeholders. It is a classic example of what we say optimum regulation. How do we balance the need of the market and protection of the investors. So this is one example of ease of doing business that we are doing now,” he added.