Buying without a clue about value

The Indian market watchdog SEBI has won a lot of plaudits from the commentariat for first ushering in an optional rating regime for IPOs of equities and then quickly making it mandatory. The initiative indeed was unique inasmuch as it was without a precedent or parallel but the discerning amongst the commentators have had a gnawing sense of disquiet about the whole thing. The rating is awarded on a scale of 5 with the rating agency blithely recusing itself from any comments on the pricing aspect. This singular feature of the rating regime has made the whole exercise farcical often pushing subscribers to purchase pig in a poke. In the event, the SEBI initiative seems to be making much ado about nothing and the approbation won by it vastly misplaced and exaggerated.

World over, there is a disenchantment with the price discovery process for IPOs. In India, in a milieu of free-pricing, companies in league with merchant bankers have been, by and large, plumping for the Dutch auction model under which the marginal bid, i.e. the one that ensures full subscription, becomes the uniform price for all the subscribers. The retail subscribers have no role whatsoever in the price discovery process and they are condemned to take or leave the price discovered by the Qualified Institutional Investors (QIIs).

Overpriced in retrospect

Most of the IPOs in India have proved to be overpriced in retrospect, leaving the retail investors holding the can and wistfully hoping for better times. It was here that the rating regime could have helped the retail investors but for curious reasons SEBI has not called upon the raters to comment on the attractiveness or reasonableness or otherwise of the pricing. May be SEBI thought commenting on pricing could put cold water on IPOs, what with merchant bankers and company promoters invariably being gung-ho about future prospects and hence overly generous with premium. Furthermore, the market for equity is admittedly more volatile than for any other product or service and hence one could be at his wits' end taking a call on this vital but dicey aspect of an IPO. In the event, a rater could be constrained to eat his words and end up with egg on his face. The market regulator seems to have been more concerned about sparing the raters the blushes than protecting retail investors whereas it ought to have been more mindful of the latter's concerns.

Cold comfort

The bottom line is the IPO rating regime is a cold comfort for the retail investors whose concerns it is supposed to address. At best a rating of even four out of five could increase their comfort levels about the qualitative aspects of the company, period. But to a harried buyer of the most complicated product that defies a scientific much less a precise valuation, it is incomplete, if not a half-baked, advice. Would a buyer of property let go a real-estate consultant who talks highly of a property but refrains from commenting on price?

(The author is a Delhi-based chartered accountant.)

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