Market experts have been following the IPO space over the last few days and evaluating how the recent IPOs have fared. There is one big listing slated early next week; some of these issues have struggled to get subscribed and some had to extend their timelines and lower their price points.
In an exclusive interview with CNBC-TV18, Debashis Basu, Editor of Moneylife Magazine and Jawahar Mulraj, Columnist in Equitymaster & India Representative for Institutional Investor Magazine discussed various issues related to the IPO space including the grey market premiums, role of merchant bankers and promoters etc.
Debashis Basu said there are international studies to prove that a frothy IPO market usually signifies a temporary or an intermediate market top. Analysing the role of grey market in the IPO market, Basu added, “The very fact that we are sitting here and using the term ‘grey market’ where there is a regulator and it's supposed to regulate everything open and above in full public view; this itself is an absolute complete failure of the regulatory mechanism.”
Jawahar Mulraj, Columnist in Equitymaster & India Representative for Institutional Investor Magazine opined that both - the merchant bankers and the promoters are on the same side of the coin, they want to get the best price for their issue. He feels that the investors have to look after themselves, make up their own mind and do their own study and not depend on false signals such as the grey market-listing price, which is often erroneous and manipulated.
Excerpts from CNBC-TV18's exclusive interview with Debashis Basu and Jawahar Mulraj:
Q: Your observations on what you been witnessing in the primary market?
Basu: Many people must have mentioned repeatedly that market was looking frothy and it’s a frothy market that attracts IPOs and overpriced IPOs but overpricing is something that one knows only with hindsight.
As long as one is able to subscribe at x price and is able to flip at a 2x price, the market is fine. There are international studies to prove that a frothy IPO market usually signifies a temporary or an intermediate market top.
But the question is who is interested in not flipping? - Because when one is buying an IPO, one doesn’t know the history of the promoter, one doesn’t have a track record to go by, the disclosures are one thing but then one doesn’t know that much and yet one is punting. Whether it is the institutional investors or it’s the retail investors everybody is punting to flip and now the flipping has stopped; some day it will start again and all will be well.
Q: Your thoughts on how promoters and investment bankers have approached primary market pricing in the last few months?
Mulraj: One lesson is clear that investors have to look after themselves. The merchant bankers and the promoters are both on the same side of the coin they want to get the best price for their issue, as indeed they should. So the investor has to make up his own mind and do his own study and not really depend on false signals such as the grey market listing price, which is often erroneous and manipulated.
I have an idea on what should be done, which maybe Sebi could consider and that is giving the track records for the past lets say one-year of the lead managers to any issue inside the prospectus. Like what issue he has brought in the last one-year, what was the price at which the IPO was priced, what was the Sensex then and how it is moved since then. With that information, investors would have an additional signal to enter the IPO in.
Q: While your point is taken about many investors and I assume you mean the retail crowd in specific taking their own call. Is that the best or the most fair way to call what’s been happening in the IPO market, I mean for many of these investment bankers they are entering the secondary market, is it also not their duty to ensure more fair pricing or something closer to the realm of what is fair really and what happens when there is a whole face value attached to it as has happened to very big IPOs that just got closed?
Mulraj: Yes, as Debashis rightly pointed out fair is what the market can bear. The investment banker considers his job as to get the highest possible price, which the market will bear. Therefore if there is some disclosure about the past track record of the lead managers, I believe that would put some sort of a counter pressure. So that over optimistic pricing is to an extent controlled through this
Q: To get the whole grey market episode into this as well and how much that has to do with pricing and post listing flipping and the whole game?
Basu: It has got something to do with it but we didn’t have a very active grey market in all cases in the past one and half year. But the very fact that we are sitting here and using the term ‘grey market’ where there is a regulator and its suppose to regulate everything open and above in full public view itself is an absolute complete failure of the regulatory mechanism. The newspapers are writing, the channels are talking about it but I don’t think anybody in the Ministry of Finance ever asked – “What is this grey market? Is it supposed to be legal? If it is supposed to be illegal what is Sebi doing about it?”
I think the whole pressure has to be on the regulator to make sure that we have a framework which is consistent with fair practices and secondly and far more importantly we should have enforcement to see that that particular framework is actually working and we don’t have either of these two and therefore a lot of investors are getting sucked into these things.
I don’t agree with Jawahar Mulraj’s logic that the investment banker should be directly accountable. One cannot relate a market environment, pricing at a point in time, one year price performance later to pricing or due diligence on the part of the investment banker.
One thing has to be made clear repeatedly that when one is buying an IPO one has to more careful because one doesn’t have the track record of the promoter and as Jawahar Mulraj said that the investment banker and the issuer is on one side and not only that sometimes even the regulator is on that side. So we have the regulator, the investment banker and probably the broker who is pushing it and the financial planner who is saying, “this IPO is very good, and you will probably be able to flipper at 2x.”All of them are on one side; it’s cynical but it’s the sad story of the IPO market.
Q: Just talk a little bit about the role of the investment banker? How much leeway does he have generally in your assessment in influencing an issue price? Is there an element of competition in the investment banking circle, which is leading even I-bankers to aim for the highest possible price with little regard to what might happen post-listing from an investor’s point of view?
Mulraj: Yes exactly that is what is happening. In fact often you get zero quote fees by investment bankers. They have other relationships to look after. So they have for example, some discretion in the allotment process through which they favour their clients. So that’s where they get their payoffs.
So they do push for a promise very optimistic pricing and issuers do get taken-in by that and that’s why I suggested to have a sort of a counter pressure and maybe if Sebi considers it appropriate to put their track record into the prospectus that might serve to be a counter balance.
Q: Come in on the same question – the interest which an investment banker would have in the size and the pricing of the issue versus comparative elements in that market?
Basu: One would be quite surprised to know that there are many smaller issues which may not be able to find an investment banker today because the cost structure, the returns, the bull market had ensured that a lot of smaller deals whether in the private equity space, whether in the IPO space don’t manage to get a good quality investment bankers and so it’s quite the reverse.
In one end of the market there is just no service available although at the higher end there is lot of competition but the competition among whom? But I can any hardly see difference between ‘X’ investment banker and ‘Y’ investment banker and why should there be? They are all in the same business; they are offering the same services, they are reporting to the same regulator, they are selling the same stuff to the same institutional investors who have exactly the identical expectation and identical practices.
I don’t see the differentiation at all. To give an example we were having a long conversation with a software company which wants to make an issue; very conscientious, very good quality promoters and I just happened to mention that - over a long period of time of your listed existence how much does it matter whether you price issue at Rs 530 or 590 or 450? How does it matter today to Narayana Murthy or Infosys at what price Infosys was priced in 1991 or whatever. I said look at the long-term; it’s okay to leave a bit on the table for everybody and after giving this whole lecture, the CFO asked me, “Why should we leave anything on the table.”So this is quality of the promoter or this is the quality of investment banker.
I can only say one thing that for a retail investor it’s a tough job on whether they should have a longer-term expectation from the IPO market or should really not bother if it its gone bad between the time they have invested and the market has fallen and think that its too bad this particular IPO has gone bad maybe five others have gone right.
Q: Is there a greater risk sometimes that you ran with the big ticket IPOs where both the pedigree of the promoter and the I-bankers may actually be blue chip and hence they can milk it for a lot more than maybe some of the small guys can?
Mulraj: I think one has to be careful for all IPOs- big ticket or small ticket. If the pricing is optimistic and if you are there only to flip then you are speculating, you are not investing. If you have a longer-term horizon and if you think the IPO price is fair, invest in that IPO or perhaps if you have got a longer-term horizon, you could buy it post-listing. This whole business of flipping and taking money, borrowing and leveraging yourself that’s what gets you into problem.
Q: One word on the idea doing the rounds from the regulator of putting some kind of circuit filters in for the smaller IPOs. Do you think that is a wise move?
Basu: I am sure; it’s a move for the time and there would be moments when it will look like a wise move when the volatility is high and all the suggestions come up during those times. In the first instance we shouldn’t have a case like Nissan Copper; it’s not the kind of stock that should come to the market and I am not sure if any of the so called well known investment bankers were involved in that and then it just goes up and down and look at where the stock is today? It’s just nowhere.
I think the real emphasis ought to be on the quality of companies that is coming to the market and Sebi does sit on prospectuses, Sebi does look at them, Sebi does look at disclosures. I wish they cut down all emphasis on irrelevant disclosure and went in for much more sensible ones looking from the recent past. But I am not sure circuit filter is going to be an issue, the moment the volatility goes down.
Yes, it might serve limited purposes at certain times but then it becomes very subjective. Why should a small issue necessarily be a bad issue? I don’t know. There are whole lot of smaller companies, which are doing exceptionally well. Today in fact a company which is going to make Rs 15 crore issue, I can tell you it’s not going to find good quality investment banker because they don’t find it worthwhile to do this. Then it is probably forced to go to a second rung investment banker and then it gets an image that this is not a good company and they should be circuit filter and so one, the whole thing becomes very subjective.
Q: You started this discussion by talking about the phenomenon of flipping that’s the other thing, which a lot of investors look at as an indicator of where the stock might list and how good the issue is, the institutional over subscription. In your eyes do you think these are quality investors who are necessarily investing for the long-term or they are every bit as much a flipper as any other retailer or HNI?
Basu: Absolutely. They are completely flippers. I have no hesitation in saying that I do not see more than 5% of the FIIs where there is a lot of round tripping and unless there is an investigation we don’t know how much of round tripping is going on. I think 95% of the people at some stage or the other are extreme short-term investors and only interested in flipping. I have seen this in 2000, I have seen this in 1995-1996 and I have seen this in 2007-2006.
In the three major bull markets it’s the same story- their faces are different, the names are the same; it could be the same Merrill Lynch or Morgan Stanley etc. these are indicative names, I don’t have anything in favour or against them. But the names may change, there will be a new set of investor, a new set of fund manager but greed ultimately takes over everybody whether it’s a guy in Rajkot or a guy in Manhattan.
Disclosure: Basu: I personally do not hold any of the stocks
Source: Moneycontrol.com
Wednesday, February 6, 2008
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