The Minister of Corporate Affairs has said that market regulator Sebi is working on guidelines for setting the price band of IPOs. But no guidelines can protect retail investors if they continue to treat IPOs as a gamble

When asked by media persons what the government plans to do to prevent promoters from fixing high price bands for the initial public offerings (IPOs) of their companies, Minister for Corporate Affairs Salman Khurshid said that the government is talking to market regulator Sebi to evolve guidelines on how the price band should be set. He also added that his ministry will develop early warning systems to prevent the misuse of IPO funds. The minister’s statement has predictably set off a debate. What can the government really do to prevent IPO prices from being fixed high and then sinking to much lower levels a few months or even days after listing? After all, the government can’t return to a CCI (Controller of Capital Issues) type regime of fixing the IPO price.

Barking up the wrong tree?

One view among experts is that the entire debate has been framed incorrectly. Typically, analysts take the IPOs for a particular period, compare the IPO price with the current price, and then declare that IPOs were overpriced or under priced. This, say experts, is an incorrect way of assessing the performance of IPOs. Says Prithvi Haldea, managing director, Prime Database: “How can you pick up the IPOs for a given period, say 2005 or 2006, and compare their prices with today’s? Market conditions vary and with it the prices of companies that had their IPOs.” Besides, he says, IPOs cease to be IPOs and become listed stocks on the day of listing. Numerous secondary markets stocks have also fallen from their highs, but nobody makes an issue of those stocks, he says. Why pick on companies that have recently had IPOs?

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