Last week, SEBI Chief UK Sinha strongly criticised merchant bankers for contributing to the poor state of the primary markets in the country.
Sinha laid out detailed numbers about the losses that investors have made from investing in IPOs over the last few years.
He pointed out that that from 2008 to 2012, there were 117 IPOs, and of those, around two-thirds of these IPOs were trading not only below the issue price but also below the price one would expect after adjusting for the general decline.
It’s safe to assume that most equity investors agree with what the SEBI Chairman has said. Yes, IPOs have been priced aggressively and investors have, by and large, found them to be a losing proposition.
Investors would like nothing better than to be able to make money ‘automatically’ from IPOs. In fact, SEBI has floated the idea of a ‘safety net’ price below which investors (perhaps only retail investors) will be recompensed by the issuer.
However, there are some home-truths that everyone should realise.
SEBI Guidelines: Appointment of Merchant Banker, Underwriters, broker, Registrar & Bankers (COM)
The first is that equity is risk capital and everyone buying stocks—whether in an IPO or the open market—should know that losses are possible. All by itself, pricing can ensure a negative outcome but not a positive one. The IPO of a great business can be rendered a poor investment by a high price but that of a poor business cannot be made a great investment by a low price.
Investors’ responsibility in choosing wisely will stay, regardless of what SEBI does.
Sinha likened the role of the merchant banker to a matchmaker between the investor and the promoter, one who should play the role of a fair mediator. Effectively, he who pays the piper calls the tune.
Merchant bankers are hired by promoters to get them money from the markets—the most amount of money for the least dilution of equity possible. Any merchant banker who tries to be fair would quickly go out of business.
This is unlikely to change.