India’s capital market regulator has asked merchant bankers to review their standards for due diligence and wants better price disclosures amid a frenzy of initial public offerings by money-losing technology startups.
Merchant bankers need to engage with a wider set of potential investors to strike a balance between issuers’ aspirations and investor interest, Securities and Exchange Board of India Chairman Ajay Tyagi said at an event organized by the Association of Investment Bankers of India on Wednesday.
“Pricing is a critical issue and perhaps more explanation on the basis of pricing in the document is a good idea, especially for the new tech companies, which are loss making,” Tyagi said.
The regulator’s comments comes after the debacle of India’s largest IPO, Paytm, in which investors lost money after the listing, denting confidence. India’s equity markets have been on a tear this year, buoyed by a central bank that slashed interest rates to record lows and millions of new individual investors seeking higher returns in riskier assets. The rally has encouraged at least half-a-dozen technology startups to seek public listings but the valuations commanded by these companies is often criticized.
“The pricing has become an issue — where you want to price it, or whether you want to leave something on the table or not — after the Paytm fiasco,” Amit Kumar Gupta, fund manager at Adroit Financial Services said. “There could be certain restrictions coming the way the IPOs are valued but this hasn’t really happened across the globe.”
Tyagi clarified that the regulator doesn’t want to interfere with valuation and only wishes that stakeholders provide proper explanations to investors. More documentation on how pricing is arrived at may help to build trust among small investors.
To protect small investors, the markets regulator in November proposed to tighten rules on how money raised by such unprofitable technology startups through IPOs can be used and how quickly big investors can exit.
“The outcome of that paper is not out yet but major changes could be made into the way the IPOs are done,” Gupta said. “That may delay some IPOs.” –Bloomberg
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