Disclosure logic. SEBI to mandate disclosure of logic behind IPO pricing

In a bid to bring in more transparency, market regulator SEBI will ask IPO-bound companies to disclose a firm logic of their pricing to see if the same is higher than the pricing of the placement of the shares done by the company in the preceding fundraising. Rules in this regard are being worked out and consultation with stakeholders has begun, sources told BusinessLine.

With thousands of crores being raised by new-age tech companies, India’s IPO market has witnessed robust participation from retail investors. But in most such firms, the IPO price rally is not guaranteed since the pricing is often favouring the selling promoters and does not leave much on the table for retail investors.

Paytm and the likes...

Recently, it was noticed that the IPO pricing of companies is way higher than the placement of shares to private investors done by them in months prior to the IPO. Moreover, the IPOs of Paytm, Zomato and the likes have called for a serious relook at the norms since their listings have spoiled the market mood.

Paytm fell around 75 per cent from its IPO price while Nykaa witnessed a dream run defying any logic behind its valuations. These are new-age tech companies that have no track record of operating profits as they are focussed on scaling up rapidly. But investors are attracted to them due to the promise of future potential.

One pattern is similar in such companies — the placement of their shares to private investors months ahead of the actual listing is done at a price significantly lower than the IPO price. In the IPO, retail investors and mutual funds are the ones who buy the shares at a higher price.

‘Rational move’

While SEBI believes it cannot have a say in the IPO pricing or the placement to private individuals, it can ensure enabling provisions that will let investors take an informed decision. Hence, the regulator wants companies to disclose the logic behind the premium they charge in the IPOs.

“This move will make IPO markets more rational ... Such a disclosure now will give a better idea to investors. The famous dialogue of investment bankers that pre-IPO shares come with a lock-in provision and hence they are cheap will not work anymore,” said Arun Kejriwal, founder of KRIS, an investment advisory firm.

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