|
An Initial Public Offer (IPO) is the selling of equity securities to the public through prospectus in the primary market. These initial public offerings can be made in three different ways in India, i.e., fixed price method, book building, or a combination of both. Recently, book building1 is a more frequently practiced mechanism than others. However, fixed price is still used as an accepted mechanism. Under fixed price mechanism an issuer company is allowed to freely price the issue. Further, the price at which the securities are offered and would be allotted is made known in advance to the investors. Demand for the securities offered is known only after the closure of the issue. Investors for fixed price issues are required to make 100% advance payment at the time of application. Regulation stipulates that 50% of the shares offered under fixed price mechanism are reserved for applications below 2 lakh and the balance for higher amount applications.
Book building as a methodology for pricing and allocation of IPO securities dominates over the fixed price mechanism. Even most of the existing IPO pricing studies are conducted under the ambit of book building environment. Book building has the unique feature in evaluating the price by which demand for the securities proposed to be issued by a corporate body is elicited and built up and the price for such securities is assessed for the determination of the quantum of securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document. Hence, book building is more close to fair valuation. However, a fixed price issue does not have that kind of market assessment provision, resulting in more difficulties in true valuation. Recent practices in IPO pricing in India in pursuant to SEBI guidelines stipulate that issuers (for fixed price IPOs) can freely price the securities. However, the basis of issue price needs to be disclosed in the offer document where the issuing firm must outline in detail, about the qualitative and quantitative factors justifying the offer price. In practice, ‘Basis for Issue Price’ clause must contain the key parameters, i.e., Earnings Per Share (EPS), Return on Net Worth (RONW) data for last three years including peer group price earning multiple and net asset value of the IPO firm as on issue date. This study is motivated to evaluate the pricing of fixed price IPOs by taking this information.
The biggest challenge being faced by IPO firms while going public is how to price the offer. Even it is more challenging for both investors and practitioners including academic scholars. Empirical studies found that IPOs are valued either directly by taking fundamental accounting information, or indirectly by comparing the IPO firm with similarly listed firm/firms from comparable industry. Though multiple approaches is the most popular valuation method, still analysts found referring financial information and other signaling, while recommending investment in an IPO. Despite a lot of research on valuation, IPO pricing is still mysterious. This paper challenges research gap by estimating the price for Indian fixed price issues by using a set of value drivers, i.e., financial, signaling and industry composite price-earning (P/E) ratio.
|
