The Ministry of Corporate Affairs (MCA) is talking to market regulator Securities and Exchange Board of India (Sebi) for evolving guidelines for the price band for public offers by India Inc, to make the process transparent and ensure funds are not diverted.
Asked what steps government could take to prevent companies from fixing arbitrarily IPO (initial price offer) price band at a very high level, Minister for Corporate Affairs Salman Khurshid told PTI: “We are examining it. Some very good people with experience of capital markets are helping us on this. This is a matter in which we are in close consultation with Sebi... It will take 3-4 months, may be six months (to come out with the guidelines).”
On some kind of limits on fixation of price bands by companies, the minister said: “We are looking at how there can be greater objectivity and transparency... (when) we get the suggestions that we are seeking, (we) would narrow down the options.”
Pointing out that misuse of money collected through IPOs was within the purview of MCA, he said: “That is something we are very careful about and keeping ourselves very alert... Early Warning System (being evolved by the MCA) will watch the misuse of IPO money.”
As per the current practice, the final price of IPO is arrived after a book-building process, the base is the price band announced by the companies before the start of the public issue bidding process.
In the absence of any guidelines, companies raising funds from the public through IPOs fix the offer price on their own, depending on their perception of the demand for shares and appetite of the market. Sometimes, to the detriment of investors, the shares are listed at below the offer price causing loss to them.
The price band is generally suggested by the investment bankers to the companies, but the reasons are not disclosed, except for cases where pre-IPO private placements take place. With the stock market picking up, several companies, including real estate firms Emaar MGF and Sahara Prime City, have filed their draft prospectus with Sebi and will be coming out with their IPOs.
In the past, shares of many companies have subsequently dropped below the issue price or the IPO price band once the trading started in them at the bourses. In some cases, the shares have dropped below the IPO price on the first day of trading itself.
In January 2008, Reliance Power came out with the country’s biggest ever IPO, where it sold shares at a price of Rs 450 per share, but these fell to as low as Rs 372 on the first trading day. Currently, the shares are trading around Rs 166 a piece. Earlier this year, PSU power company NHPC sold shares at a price of Rs 36 a piece, but within a week it slid to below the issue price and is currently trading near Rs 34 a piece.
