THE GIST of Editorial for UPSC Exams : 07 February 2020 (How to make IPOs less hair-raising (The Hindu))

How to make IPOs less hair-raising (The Hindu)

Mains Paper 3:Economy
Prelims level:Initial public offerings
Mains level: Effects of misleading indicators to make IPO decisions by retailers

Context:

• The events leading up to the SBI Cards and Payments offer show the hair-raising time that retail investors have when they decide to apply to IPOs (initial public offers).
• The offer has finally closed with a bang, with the QIB, NII and shareholder portions over-subscribed 57, 45 and 25 times respectively; but, the retail portion was subscribed a muted 2.5 times.
• The episode shows that, despite concerted efforts by SEBI to get retail investors to take informed decisions on IPOs based on their own due diligence, they often end up relying on unreliable indicators that lead them down the garden path. But investors cannot be entirely blamed for this.

Smart money?

• In the developed markets, regulators ensure that issuers and investors in IPOs have a safety net by insisting on firm under-writing commitments from merchant bankers.
• In India, however, the regulator takes a very different view and relies on institutional investors to quality-check IPOs on behalf of retail investors.
• It doesn’t mind offers failing if..........................................

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Ineffective price bands:

• To ensure that issuers in cahoots with merchant bankers do not fix unrealistic asking prices, SEBI has made it mandatory for book-built offers to specify a price band for the shares, so that investors discover the offer price through competitive bidding.
• Institutions are required to bid first and retail investors can go with the cut-off price decided by their bids.
• The market discovering offer prices for IPOs that were close to fair value, it has not worked that way in practise.
• One in five IPOs in India in the last 20 years listed at a significant discount to the offer price, while one in eight delivered 50 per cent-plus listing gains.
• One reason for these extreme outcomes is that, over the years, IPO price bands have narrowed to such an extent that there’s little actual room for competitive bidding.
• While SEBI rules allow a 20 per cent gap between the floor and ceiling price for book-built offers, most IPOs are now offered at wafer-thin price bands.
• The SBI Cards IPO wanted investors to bid within a price band of ₹750-755, Prince Pipes and Fittings at ₹177-178, Ujjivan Small Finance Bank at ₹36-37 and CSB Bank at ₹193-195.
• For IPOs to offer scope for price discovery through auctions, SEBI must insist on a minimum spread of say 10 per cent, between the floor and ceiling price.

Information overload:

• To ensure that issuers make full disclosures to prospective investors, SEBI has steadily raised both the quality and volume of data that issuers must pack into their offer documents. IPO prospectuses now run into several hundred pages.
• The retail investors are ....................................

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Late price-setting

• SEBI’s financial filters and disclosure norms have made sure that the quality of businesses tapping the Indian market has improved by leaps and bounds. But with IPOs still bunched up in bull markets, ambitious pricing trips up investors.
• The pricing of an offer is a make-or-break input into the subscription decision.

Way ahead:

• Yet, investors have a very limited window of time to assess valuations for IPOs, because SEBI rules allow price bands to be announced just two working days before the issue.
• Investors may be able to make better-informed decisions on IPOs, if they are given access to the price band a week ahead of the offer. Surely IPO pricing must not be so fickle as to be affected by weekly market swings.
• But what if SEBI makes the above tweaks to the IPO process and still finds retail investors making IPO decisions based on informal sources?

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Prelims Questions:

Q.1)With reference to the Flow Diverter Stents Technology, consider the following statements:
1. Researchers of Sree Chitra Thirunal Institute of Medical Science and Technology (SCTIMST), have developed an innovative intracranial flow diverter stent for the treatment of aneurysms of the blood vessels of the brain.
2. Flow diverters stents when deployed in the artery in the brain bearing the aneurysms, divert blood flow away from the aneurysm, thus reducing the chances of its rupture from the pressure of blood flow.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: ..........................

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Mains Questions:
Q.1)Retail investors seem to rely on all sorts of misleading indicators to make IPO decisions. Can SEBI remedy this?