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IPO PROCESS MAKEOVER

Published on Sun, Feb 12,2012 | 09:28, Updated at Thu, Apr 26 at 15:54Source : CNBC-TV18 |   Watch Video :

The Facebook IPO may reinvigorate in the American primary markets. But here in India the dry spell continues. Last year 29 IPOs were called off and in January - 4 IPOs got cancelled. Add to that SEBI's order penalising 7 companies and their managements for misusing proceeds of IPOs and it's clear that the gaps, both regulatory and in appetite need urgent fixing. SEBI has assigned that job to an 18 member primary markets advisory committee under the chairmanship of TV Mohandas Pai. Sajeet Manghat & Menaka Doshi ponder over what the agenda should be

SEBI Chairman UK Sinha  on Nov� 2011

�The IPO process or the primary market fund raising process is very old so far as SEBI is concerned. We have decided we are going to have a complete review of the IPO process. We have set up a group. The group has started working. Anybody who has any suggestions is most welcome to give. The idea is to make fund raising more efficient by way of cost and time.�

Mr. Sinha, before we get to cost and time, we'd like focus on reach. Of the 14 mid & large size IPOs of last year, the retail portion of four was undersubscribed and the remaining 10 barely managed to fill their retail quota. Another way to look at it is by average number of retail applications � 27073 in a year when the marquee L&T Finance IPO with over 4 lakh retail applications offered a glimpse of what healthy retail appetite can add up to.

SEBI is now faced with the daunting task of re-establishing retail confidence in IPOs. Its first step in that direction has been to facilitate easy market access. By implementing uniform know your customer regulations; the regulator is trying to ensure that investors need not go through time consuming KYC checks each time they invest in the markets. Bankers suggest the other move could be to sell IPOs through a wider network. Currently, the book running lead managers use syndicate members to drive subscription. Investment bank, Avendus that managed 7 IPOs last year, says it is time to move to a broker platform.

Girish Nadkarni

ED & Head ECM, Avendus

�The secondary market system can be used for IPOs itself then u can eliminate a lot of the paper work a lot of the processes timeline can be shortened because then effectively what you are saying any investors who want to bid in an IPO will go to the broker and buy shares from the broker the way he does his secondary market shares.�

Debasish Purohit

Head � ECM, Merrill Lynch

�If you say can use the settlement mechanism offered by the stock exchanges for the IPO processes which it goes through the exchange settlement process in which each broker can upload bids on behalf of his clients and everything is guaranteed by the settlement mechanism of the stock exchanges.�

A speedier process will also help make pricing more contemporary and relevant. Currently, an IPO process takes nearly 6-8 months to complete including 10-12 days to list once the offer closes. It�s in that period the price is finalised from within a band. And though this has been crunched from the earlier period of 20 days...there is scope for further shortening of timelines.

Debasish Purohit

Head � ECM, Merrill Lynch

�In a volatile market like we are facing even a T+10 kind of listing it seems like a lifetime things can change between the time you price the transaction and you can list the transaction which in a way acts as an deterrent for some of the investors in an extremely volatile period which is what we are going through probably there is a mechanism through which we can bring down the listing period from existing 9 or 10 days save it by couple of days to 2 or 3 days.�

It's not just when, but also how the price is determined that needs reviewing. Of the last 39 IPOs, more than 30 were trading below their issue price within days of listing. Is this simply due to market volatility or are companies and their bankers overpricing issues? SEBI, it seems, has concluded that overpricing may be one big reason and last year it asked bankers to disclose the performance of previous offers managed by them. This way investors are better informed about the bank�s IPO track record. But bankers argue that is not the problem neither the cure. They believe the current system of determining a price band, fixing a price based on maximum demand and making proportionate allocations makes institutional investors price takers rather than price setters. To discover the right price, institutions must play a price setting role. And so some bankers are now advocating a move to a floor price and an auction process.

Girish Nadkarni

ED & Head ECM, Avendus

�If you actually end up working with institutional investors on let�s say the French auction or Dutch auction where investors are encouraged to bid at a price and therefore have some sense of the allocations that they will get the issuers can determine what that is whether it is price preference or what kind of system will be determined for the allocation but price discovery has to happen but unfortunately in the current system the price discovery does not happen.�

Girish says to save retail investors auction complexity, book-building can be limited to institutions and the price discovered offered to retail and HNI investors. But not everybody agrees.

Rahul Guptan

Partner, Clifford Chance Asia

�I don�t think that is the way to go, if you see the IPO allocation process you have close to 40% of the IPO subscribed by the retail investors and NIIs and that�s a huge constituency of investors or chunk going to that category and effectively you are disenfranchising this investors to make a judgement on the price of the shares.�

Generating more retail appetite, making pricing more contemporary and giving institutions a say in the pricing are important changes that most bankers I spoke to believe are necessary. But there is debate on the best way to achieve this and that�s the challenge the committee will have to overcome. The bigger challenge, though, is not procedural but one of conviction- of better corporate governance.

In last year�s order on 7 IPOs, SEBI found that companies had inflated asset values and in some cases the assets did not even exist. In others, IPO proceeds were used by promoters and their associates to fund investors and boost IPO subscription, creating fake demand. Besides timely prosecution, SEBI hopes more scrutiny by the issue bankers will help fix these problems. Sanjay Asher, a member of SEBI's primary markets advisory committee agrees. He says the investment bank should carry out its own audit over and above the statutory auditor report. This may increase the cost of issue by as much as 0.5-1% of the issue size, but that could be recovered from the issuer.

Sanjay Asher

Partner, Crawford Bayley & Co.

�The bar on a normal IPO is higher than a normal audit which a auditor do because a investor or a common man is investing into the company on the basis of statement made in the offer document surely there is a provision in the companies act which states that if there is a misstatement in the offer document the directors are subject to prosecution.�

Debasish Purohit

Head � ECM, Merrill Lynch

�It is possibly physically impossible and there are practical limitations to carry out 100% physical checks of every single things in the process we do rely a lot on other professional agencies like the auditors we do rely on management presentations we do undertake as part of global practices third party checks, and AML checks and things like that.�

Rahul Guptan

Partner, Clifford Chance Asia

�I think the real liabilities of the prospectus lies with the board of directors of the companies and enforcement against issuers and directors is probably something that needs to evolve more in India and the regulatory actions against the investment bankers definitely keep the industry in check but it has to be at two levels not just the investment bankers but issuer companies as well.�

Last year, in the same order, the 7 companies were also fined for misusing issue proceeds. Despite clear laws against this, poor monitoring has completed the trust deficit. So who should bear the burden of ensuring that IPO proceeds are put to the stated use? The issuer or bankers?

Sanjay Asher

Partner, Crawford Bayley & Co

�Investment bankers- difficult for them to monitor the use of proceeds after the listing I think the independent director or the audit committee should be made responsible of the use of the proceeds.�

Rahul Guptan

Partner, Clifford Chance Asia

�Any additional obligation placed on the investment bankers is placing almost an investigative or forensic level of standard on them and I don�t think that�s standard that is required in any jurisdiction and I think it would be a bit harmful to the practice of investment banking if such standards are put in place.�

Any review of IPO regulations will not be complete without addressing the listing day volatility issue. SEBI has been grappling with this for a while and just last month it announced key changes. All debutants or re-listers will have to undergo a pre-open call auction for the first one hour. And for the first 10 days post listing, companies depending on their size will face circuit filters of 5 or 20%. Whether it curbs price volatility on the 11th day is something that will be tested only in the next IPO.

Multi-commodity Exchange or MCX is expected by the month end. And that will test the new listing day volatility curbs. As for the other issues we are keenly awaiting the primary market committee�s report.

 
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