While the IPO market in the United States is gaining momentum, in India, the initial public offering (IPO) market continues to suffer a dry phase.
Last year, 29 IPOs were called off while this year, four were cancelled in January. Add to that the Securities and Exchange Board of India’s (Sebi) order penalising seven companies (and their managements) for misusing their IPO proceeds to boost subscriptions and inflate demand. It is clear that the gaps, both regulatory and appetite, need urgent fixing.
To that end, UK Sinha, Sebi chairman, has assigned the task of an IPO makeover to an 18-member primary markets advisory committee under the chairmanship of TV Mohandas Pai. “The idea is to make fund raising more efficient by way of cost and time,” said Sinha.
'The IPO process or the primary market fund raising process is very old so far as SEBI is concerned.' UK Sinha, Sebi. AFP
Of course, cost and time are not the only problems. The confidence of retail investors in IPOs is sorely lacking too. Of the 14 mid- and large-sized IPOs of last year, the retail portions of four offers were under-subscribed; the remaining also just barely managed to fill their retail quotas.
Faced with the task of reviving retail confidence in IPOs, Sebi has tried to facilitate easier market access by introducing uniform know your customer regulations.
However, most experts believe that the IPO market needs more reforms. For instance, there needs to be checks at two levels: monitoring of investment banks that take care of the IPO; and keeping note of issuer companies.
Girish Nadkarni, ED and head of Avendus, an investment banking firm,suggests the use of secondary markets for IPOs, which will not only cut paperwork but also shorten the timeline. He adds that to avoid complex procedures in auctions for retail investors, book-building can be limited to institutions and the price discovered offered to retail and high-net worth individuals or HNI investors thereafter.
But not everybody agrees. Rahul Guptan, partner, Clifford Chance Asia, is one of them. He believes the bigger changes required are generating more retail appetite, making pricing more contemporary and giving institutions a say in pricing.
Debasish Purohit at Merrill Lynch says a speedier process could also make pricing more contemporary and relevant. Currently, the entire process of an IPO takes nearly six to eight months, including 10 to 12 days to list once the offer closes although there is ample scope for reducing that timeline.
Sanjay Asher, partner at Crawford Bayley & Co, adds that since it is difficult for investment bankers to monitor the use of the proceeds after listing, independent directors or the audit committee should be held responsible for the proper use of proceeds.
Watch the full report on CNBC TV 18: