SEBI chairman denies regulatory involvement in IPO pricing

Ever since some of the digital IPOs gave a poor performance post-listing in 2021, there have been questions about whether SEBI should regulate the price setting process more closely. In response, the SEBI chairperson, Madhabi Puri Buch, has clarified that the capital markets regulator (SEBI) really had no business to suggest pricing of the IPO in the case of new-age technology companies. She emphasized that SEBI would make deeper disclosures mandatory, but would leave the pricing to the issuers and the investment bankers.

Speaking at the Capital Markets Summit organized by the Federation of Indian Chambers of Commerce and Industry (FICCI), Madhabi did emphasize the need to have more detailed and granular disclosures by companies. She underscored that when there is a substantial gap between the pre-IPO placement valuation and the IPO valuation, the onus would be on the issuer and the merchant banker to give a legitimate and convincing justification for such a sharp difference in valuations. If the price can be justified, SEBI would be OK with it.

Addressing queries on IPO pricing at the FICCI Summit, the SEBI chairperson underscored that a lot had been already said and written about the pricing of IPOs of tech companies, the price point for the IPO etc. However, she also emphasized that price selection for the IPO was not the regulator’s business nor would the regulator want to give any suggestions to that effect. However, Madhabi added that if a start-up had sold shares at Rs100 to PE funds and then did the IPO at Rs450, then the company needs to justify valuations in detail.

In short, the pricing of the IPO was the prerogative of the company issuing shares based on their consultations with the investment bankers. The regulator had no objection to the company asking for a higher price in the IPO as long as they could disclose in granular detail what happened in the intervening period to justify a massive spike in valuations. There have been cases of unsuspecting investors getting into such overpriced IPOs in the first place and then discovering that their liquidity had been completely locked in at a huge loss. 

Regarding the case studies of many digital IPOs quoting at huge discounts to their issue price, the SEBI chairperson underlined that such questions must be posed to the investment bankers as they would be in the best position to answer these questions. However, the SEBI chief did add that the regulator was currently analysing IPO data to evaluate the breadth of retail participation in such issues and how disclosure norms could be made more elaborate as to give conclusive clues to the investors about the merits of the IPO investment.

In a sense, the regulator has made its stand clear that they cannot get into the pricing detail of the issue. That is for the issuer and the investment bankers to figure out. Also, the onus is eventually on the retail investor who must sit with their financial advisors and arrive at an investment solution. From the regulatory perspective, they can insist on two things. Firstly, SEBI can and would insist on more elaborate and transparent disclosures. Secondly, SEBI will also insist on price justification when the valuation in the IPO is substantially higher.

At the end of the day, these issues are best solved by the market forces. One has to just look at how the digital companies have developed cold feet about randomly aggressive pricing in the Indian IPO markets. This has forced a lot of digital players to put off their IPO plans. That is small price to pay. In the process, if the IPO markets become more robust and safer, it will be in the larger interests of the investors only. For now, one needs to wait and see how SEBI makes its next steps on transparency and premium justification for these new age issues.