Has SEBI failed the common investors by allowing inflated IPOs?
SEBI's official website mentions its basic function as: 'to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto'. The recent debacle of PayTM IPO calls into question the effectiveness of SEBI in its stated function. The main problems seem to be the process of company valuation. The recommended methods of valuation are either based on Assets or Return on investments (ROI). In the case of PayTM, the value based on assets which is the Book value per share is about Rs 102 (as per Moneycontrol.com) but the price at which shares were offered is about Rs 2000/- Even the way the book value has been calculated would merit scrutiny, particularly in a case where physical assets may be quite limited. As to ROI, the company has only been making losses, so there is no return and this method of valuation cannot be applied. The promoters have also made it clear that the profitability is not expected in the near term. So how this price of 20 times the book value is justified even if we accept the book value as valid is a logical doubt (In comparison Reliance Industries share price to book value ratio is currently around 2).
Such IPOs attract a large number of people purely on the expectation that the share price will rise immediately when the share is listed in the the stock exchange and thus they can exit making a quick profit. Sometimes they succeed and often they fail. The only people who gain are the promoters, employees with shares and venture capitalists who are able to liquidate their holdings at the vastly inflated prices. The tendency of simply looking to get profits based on market booms and not on the long term returns is not investing. It is just speculation.
Whatever it is, SEBI seems to be permitting IPOs at prices which cannot be supported by the above 2 accepted approaches of valuation thus putting the money of those who invest in the IPO at risk. Linking of share price to the actual financial parameters of the company not only for IPOs but the entire secondary market pricing is worth considering. more
Such IPOs attract a large number of people purely on the expectation that the share price will rise immediately when the share is listed in the the stock exchange and thus they can exit making a quick profit. Sometimes they succeed and often they fail. The only people who gain are the promoters, employees with shares and venture capitalists who are able to liquidate their holdings at the vastly inflated prices. The tendency of simply looking to get profits based on market booms and not on the long term returns is not investing. It is just speculation.
Whatever it is, SEBI seems to be permitting IPOs at prices which cannot be supported by the above 2 accepted approaches of valuation thus putting the money of those who invest in the IPO at risk. Linking of share price to the actual financial parameters of the company not only for IPOs but the entire secondary market pricing is worth considering. more
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As per SEBI chairman they dont want to get into valuation. They want to leave valuation to market forces. This doesnt seem to be a great idea since the markets are not representative of any logical valuation. SEBI just wants to wash off its responsibilities and selectively focus on some stray issues. more
Dec 08
Does SEBI have the teeth to fix IPO price? In the case of PayTM, what is the conclusion of SEBI after evaluating it's evaluation? My wild guess is SEBI evaluated and determined that PayTM is on solid footing. And, again, my wild guess is SEBI cannot set IPO price, and that a company can set its own IPO price after disclosing SEBI's findings. If the above are the rules, then it is up to the individual investor to understand the pertinent documents and make a decision to buy or not. If the pertinent documents are not user-friendly, then the individual investor has to stay away from individual stocks and look into other alternatives. more
Nov 23
But they have three power to block an IPO and ask uncomfortable questions. But there is just no will to do all that. They always blame someone else after a debacle including those who apply for the IPO. more
Nov 23
SEBI should not have allowed the issue of paytm or the likes issues to the protect the interest of hapless investors, many of whom are laymen. The merchant bankers, underwriters and rating agencies are equally responsible for this type of frauds. more
Nov 22
SEBI as regulator has bounden duty in these areas. They cannot shrug their responsibility towards investors. Investors also duty bound to study as their hard earned money being invested. more
Nov 22
