Madhabi Puri Buch, the chief of the Securities and Exchange Board of India (SEBI) has pledged to address the issue of inflated valuations in Initial Public Offerings (IPOs) as several companies flood the market with their share sales.
Record-Breaking IPOs
This week witnessed five companies, including Tata Technologies, launching their IPOs, accumulating an unprecedented ₹2.6 lakh crore in application amounts. Buch, responding to concerns about soaring premiums for certain IPO shares, expressed agreement, stating, “We are fully with you on this, as the reasons given for high premiums are mere meaningless English words.”
Speaking after SEBI’s board meeting, Buch affirmed, “We will certainly investigate and resolve this issue.”
It’s worth noting that some companies and their investment bankers move IPO pricing by setting a low face value and then significantly elevating the issue price under the guise of a high premium.
Timing of Issues
Regarding the timing of IPO releases, Buch clarified that SEBI’s role isn’t to dictate market timing. She emphasised, “We leave the timing to the market itself. Mandating a specific time may not serve the best interests of both the issuer and the investors.”
She also assured that the market’s capacity to handle such issuances is adequate, dismissing concerns about the system’s ability to manage the load.
When asked about the possibility of allowing a green-shoe option in IPOs, Buch explained that practically, it’s feasible. However, conceptually, it presents challenges due to the inherent nature of equity dilution in IPOs. She stated, “Unlike other market instruments, an IPO involves equity issuance. Permitting a green-shoe option could lead to unwanted dilution and other implications.”
Caution to Investors
Last week, Buch cautioned retail traders against heavy betting in the derivatives market. Investors should instead concentrate on long-term prospects offered by equity markets, Buch said, speaking at the launch of the Investor Risk Reduction Access (IRRA) platform.
Buch recalled a study carried out by Sebi last year which showed nine out of ten investors lost money in the derivatives market. Trading on a short-term basis could lead to situations where the investors incur losses on a weekly basis, she added.
The Sebi chairperson said if investors take a long-term view, the possibility of investment calls going wrong would be lower.
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Updated: 26 Nov 2023, 12:10 PM IST