SEBI'S TRANSPARENCY NORMS MAY CHANGE IPO GAME

SEBI'S TRANSPARENCY NORMS MAY CHANGE IPO GAME
Arun Kumar, New Delhi
The Economic Times

The stock market regulator’s move to create a level-playing field between institutional and other investors by prohibiting companies doing initial public offers (IPOs) from sharing financial projections with research arms associated with the sale arrangers may change the way IPOs are sold to investors, investment bankers say.

Since analysts associated with investment bankers who are selling the issue cannot make financial projection, it would be difficult for the advisors to come up with price estimates even in pre-IPO road shows, said a leading investment banker on condition of anonymity.

The Securities and Exchange Board of India, or SEBI, came out with a new disclosure and investor protection guidelines on September 3, which state that the research report should be only based on the published information as contained in the offer documents which analysts at non-arranging brokerages and retail investors rely on.

Before SEBI’s rule tweak, the market practice was for banks advising companies to share financial numbers with the analysts associated with their research department, which in turn prepare a report making their own future projection in comparison to the peer group. These reports are subsequently shared with institutional investors prior to filing the prospectus. They are not meant for the retail or ordinary investors.

But the new guidelines say that “no selective or additional information or information extraneous to the offer document shall be made available by the issuer or any member of the issue management team/ syndicate to any particular section of the investors or to any research analyst in any manner whatsoever including at road shows, presentations, in research or sales reports or at bidding centres”.

Research houses not associated with the issue and have no access to the company’s financial details can make their own projections based on publicly available information. In the recent NHPC share sale, for instance, CLSA, a unit of France’s Calyon, which was not advising on the issue, said the issue was overpriced in comparison to its peer group.

Some 30 companies, which were planning to file prospectus for public offers by September 30, including Sahara Prime City, Lodha Developers, Emaar MGF, and Godrej Properties, have to decide the prices at which they plan to sell their shares based on the new rules. These companies plan to raise between Rs 3,000 crore and Rs 5,000 crore.

Reaction from investment bankers to the new rule was generally negative, though none were willing to be quoted by name. Reports from analysts at investment banks involved with the share sale help in pricing IPOs, and in arriving at the company’s fund requirements, said another banker and added such a practice is followed in the US.

Based on the investment plan and implementation schedule of the companies, analysts make their future projections and fund requirements, which are used to give a benchmark valuation and arrive at a price band, said a banker. These reports are not shared with ordinary investors, he added.

If under the new dispensation, even indicative projections are not available, how will you price the issue, asked a banker?

The latest move hinders price discovery and provides room for uninformed analysts’ reports to confuse investors, according to investment bankers.

Bankers said that even in case of follow-on public issues, such as those of Rural Electrification Corporation and NTPC, which are planning to sell shares by the end of this fiscal, analysts associated with advisors to the issue couldn’t project earnings. This may distort pricing, said a banker.