India's IPO market has been crying for reforms for years. The regulator is now showing signs of attending to this. But a Sebi consultation paper released last week proposes tinkering with rules when what's required is an overhaul.
India's equities market has come a long way since the anarchic days of MS Shoes and Harshad Mehta, when information was non-existent and IPO offer documents were the privilege of the elite, and elusive to the regular guy. The Sebi paper proposes changes to (a) discretionary allotment for anchor investors, (b) reservation for insurance companies, and (c) flexibility to sell to retail investors.
All three are more about moving the numbers up and down in the IPO process rather than anything meaningful. This is the era of AI when information asymmetry between institutions and individuals has narrowed. Even investors from remote Kalahandi can learn from Aswath Damodaran on fundamental analysis of a company. So, why is the Sebi paper wanting to raise allocation for institutional investors such as insurance and anchor investors, and reduce it for retail, when it comes to big IPOs?
The belief that retail investors are incapable of understanding nuances of share sales, and institutions are endowed with unique capabilities, is at the root of the existing rules. Unfortunately, the Sebi paper seems to propose to perpetuate this in circa 2025.
Few investors call their brokers on the phone these days. Much of the investing community uses apps. Almost every brokerage worth its name issues IPO analyses. Any retail investor looking to invest can access either his own broker's note or reports that are online. When retail ignorance is no longer applicable, should Sebi continue with stratification of the IPO market?
The paper presents plentiful data on the IPO market, but the proposals suggest a wrong reading of the data. It favours reducing the retail portion in IPOs above ₹5,000 cr to 25% from 35% due to the 'muted' response to some big issues. Since 2022, only 2 - Hyundai Motor and LIC, both overvalued relative to their listed peers - of the 11 IPOs of more than ₹5,000 cr ended at a discount on listing day.
The paper also argues for reducing retail allotment based on how some big IPOs received poor response. Sebi data shows that 4 - Hyundai, Afcons, Delhivery and Hexaware Technologies - of the 11 weren't oversubscribed.
Proof of their worthiness was how they did after listing. Afcons, a unit of the debt-laden SP Group, and Delhivery, backed by Carlyle and SoftBank, are languishing below IPO price three years after listing. Hexaware and Hyundai are underperformers.
Sebi also says that at least 7-8 lakh applications are required for an IPO of ₹5,000 cr, and at least 1.75 mn for a ₹10,000 cr issue. In the same period, Bajaj Finance - which is trading 40% higher than its IPO price - received nearly 9 mn applications in total and got bids worth 67x in the retail, wealthy segment for ₹52,000 cr. Vishal Mega Mart and HDB Financial received bids of more than ₹20,000 cr from the same group.
To cut allotment to retailers based on the response to a few is to miss the fact that success of a primary sale is not determined by size, but how it is priced.
A correct reading of the data would have led to the conclusion that retail investors were right in ignoring those issues, and institutional investors were wrong in bidding for them. The consultation paper would have been richer with some fundamental analysis, instead of proposing amendments based on reading of data to push a particular view.
Which brings up the question of whether the IPO market needs compartmentalisation of investing classes in the first place. After all, money from insurers, MFs and even PMS schemes are ultimately from retail investors.
So, is it time to scrap the segmentation and go for an IPO market where all investors are in the same bucket? When both the mighty and the minion can play in the unified secondary market, what prevents them from doing the same in the primary market? After all, Warren Buffett avoids IPOs because the process is opaque. Indian markets are no different.
The consultation paper should have examined how some IPOs ignored by the market due to overpricing were 'bailed out' by institutional investors. Sebi's record in identifying, and punishing, manipulators in the secondary market is exemplary. It needs to do the same in primary markets.
Current rules governing primary issuances, including the compromise on 25% minimum public holding, give intermediaries and issuers undue advantage. The latest proposals can only strengthen their grip, rather than benefit investors. Sebi should, instead, scrap institutional and individual segmentation to make it a single market.
India's equities market has come a long way since the anarchic days of MS Shoes and Harshad Mehta, when information was non-existent and IPO offer documents were the privilege of the elite, and elusive to the regular guy. The Sebi paper proposes changes to (a) discretionary allotment for anchor investors, (b) reservation for insurance companies, and (c) flexibility to sell to retail investors.
All three are more about moving the numbers up and down in the IPO process rather than anything meaningful. This is the era of AI when information asymmetry between institutions and individuals has narrowed. Even investors from remote Kalahandi can learn from Aswath Damodaran on fundamental analysis of a company. So, why is the Sebi paper wanting to raise allocation for institutional investors such as insurance and anchor investors, and reduce it for retail, when it comes to big IPOs?
The belief that retail investors are incapable of understanding nuances of share sales, and institutions are endowed with unique capabilities, is at the root of the existing rules. Unfortunately, the Sebi paper seems to propose to perpetuate this in circa 2025.
Few investors call their brokers on the phone these days. Much of the investing community uses apps. Almost every brokerage worth its name issues IPO analyses. Any retail investor looking to invest can access either his own broker's note or reports that are online. When retail ignorance is no longer applicable, should Sebi continue with stratification of the IPO market?
The paper presents plentiful data on the IPO market, but the proposals suggest a wrong reading of the data. It favours reducing the retail portion in IPOs above ₹5,000 cr to 25% from 35% due to the 'muted' response to some big issues. Since 2022, only 2 - Hyundai Motor and LIC, both overvalued relative to their listed peers - of the 11 IPOs of more than ₹5,000 cr ended at a discount on listing day.
The paper also argues for reducing retail allotment based on how some big IPOs received poor response. Sebi data shows that 4 - Hyundai, Afcons, Delhivery and Hexaware Technologies - of the 11 weren't oversubscribed.
Proof of their worthiness was how they did after listing. Afcons, a unit of the debt-laden SP Group, and Delhivery, backed by Carlyle and SoftBank, are languishing below IPO price three years after listing. Hexaware and Hyundai are underperformers.
Sebi also says that at least 7-8 lakh applications are required for an IPO of ₹5,000 cr, and at least 1.75 mn for a ₹10,000 cr issue. In the same period, Bajaj Finance - which is trading 40% higher than its IPO price - received nearly 9 mn applications in total and got bids worth 67x in the retail, wealthy segment for ₹52,000 cr. Vishal Mega Mart and HDB Financial received bids of more than ₹20,000 cr from the same group.
To cut allotment to retailers based on the response to a few is to miss the fact that success of a primary sale is not determined by size, but how it is priced.
A correct reading of the data would have led to the conclusion that retail investors were right in ignoring those issues, and institutional investors were wrong in bidding for them. The consultation paper would have been richer with some fundamental analysis, instead of proposing amendments based on reading of data to push a particular view.
Which brings up the question of whether the IPO market needs compartmentalisation of investing classes in the first place. After all, money from insurers, MFs and even PMS schemes are ultimately from retail investors.
So, is it time to scrap the segmentation and go for an IPO market where all investors are in the same bucket? When both the mighty and the minion can play in the unified secondary market, what prevents them from doing the same in the primary market? After all, Warren Buffett avoids IPOs because the process is opaque. Indian markets are no different.
The consultation paper should have examined how some IPOs ignored by the market due to overpricing were 'bailed out' by institutional investors. Sebi's record in identifying, and punishing, manipulators in the secondary market is exemplary. It needs to do the same in primary markets.
Current rules governing primary issuances, including the compromise on 25% minimum public holding, give intermediaries and issuers undue advantage. The latest proposals can only strengthen their grip, rather than benefit investors. Sebi should, instead, scrap institutional and individual segmentation to make it a single market.
MC Govardhana Rangan
The author writes on financial markets and public policy.