The recent string of IPOs trading lower than their issue
prices has once again reopened the debate about valuation of
IPOs, price discovery method through book-building and
the perennial question, "whether enough was left on the table
for investors".
Absolute negative returns from 122 out of 157 IPOs during
2007-09 seems to suggest that the investors have indeed
lost anywhere from 1.9%-93.78% (Refer Table 1). In sharp
contrast, there have also been instances where investors have gained as
high as 216% in case of Edserv Softsystems Ltd., a company
providing education services, using various technology platforms (Refer
Chart 1).
So where does the problem lie? Is it the pricing, performance
post issue, market risk and volatility, grading, etc., and by wealth, do
we mean listing gains only or value creation over a period of time.
These are some of the issues which this article attempts to answer.
The Institute of Chartered Accountants of India (ICAI)
had undertaken a study of IPO overpricing for issues from January
2007 to April 2008 which recommended that EV (Enterprise Value)
based multiples (e.g., EV/Sales, EV/EBITDA, EV/EBIT) and
industry-specific parameters should be considered for pricing. Also to
curb large blocks of shares from being dumped for listing gains, a
short-term capital gains tax may be imposed or a lock-in period
be introduced for institutional investors. Scope of grading agencies
may be widened for valuation exercise since agencies have
analytical competence and would act as independent entities free
from promoter interference. |
