Bhave slams i-bankers for overpricing IPOs

MUMBAI: Crusading market regulator CB Bhave charged investment bankers with fleecing investors by pricing (IPOs) at astronomical valuations, leading to investor anguish when the market tide turns.

Steep pricing could enrich bankers and companies, but persistence of the practice could demoralise investors, damaging capital markets, he said in what may be the first regulator comment on share-sale pricing since the abolition of the Controller of Capital Issues in 1992.

“In a bid to maximise returns for promoters, they (investment bankers) are not looking at the interests of investors," Mr Bhave, chairman of the (Sebi), said at a banker conference. "You need to introspect whether it is a healthy practice. If you keep investors disappointed day in and day out, the cause of investors will only be a lip service.”

Mr Bhave’s criticism comes amid a surge in IPOs by companies at prices disproportionate to their revenues, profits and net worth. A lot of these IPOs don’t yield much returns to investors in the early years as they tumble steeper during a market downturn as they were sold at prices steeper than fundamentals justify.

The underperformance of the BSE IPO index—it gained 14.5% in the last 12 months, when the benchmark Sensex rose 19.45%—reflects the chairman’s charges. Furthermore, a price performance study by CARE Research, a unit of rating company CARE, showed that 62% of the 116 IPOs between August 2007 and August 2010 are trading lower than their sale price while 35% are ruling higher.

“Issuers are not leaving enough on the table for investors, which is why we are seeing low participation from retail investors even though the secondary market is buoyant," said Mr Bhave. "Intensive competition among investment bankers are hurting investors’ interest.”

Some of the recent issues reflect his concerns. Career Point, a company that runs tutorial classes, sold its shares at 32 times its past year earnings when the benchmark is trading at 19.5 times. Ramky Infra, a builder of roads, is estimated to have been priced around 21 times. Orient Green Power, with revenues of Rs 56.2 crore, is seeking a valuation of about Rs 2,500 crore.

While these issues have received investor interest, they also raise memories of such past issues that led to tears.

India’s biggest share sale by Reliance Power in January 2008 has left investors poorer by 42% now, adjusted for bonus. So was the case with India’s biggest real estate developer, DLF , whose shares have fallen 30%.Future Capital Holdings is down two-thirds from a sale price of Rs 765.

“It is not only the investor who suffers but also the credibility of the merchant banker if the IPO does not offer returns to the investor," said Nagendra Bhatnagar, chairman, Association of Merchant Bankers in India, and MD, IDBI Capital Market Services. "We will be discussing the issue further and it is a question of self-regulation and we are in the process of revamping the code of conduct and sensitising the members as in the long run it earns a bad name for the industry.”