Sebi red flags IPO pricing, zero fees

The capital market regulator trained its guns on the investment banking fraternity. This comes soon after it pulled up mutual funds for taking "exorbitant" commissions from investors.

The Securities & Exchange Board of India (Sebi) pulled up investment bankers for holding the interests of promoters above those of investors. "If you look at maximising the price for promoters, then obviously you are not looking after the interests of investors," said Sebi Chairman C B Bhave.

He was delivering the keynote address at an Association of Merchant Bankers of India event. "Something must be left on the table for investors as well," he added.

Bhave's statement assumes significance as the primary market is showing signs of revival and investment bankers are vying to bag mandates. The sharp spike in share prices has prompted companies that have been waiting on the sidelines to jump into the primary market. Since Monday last week, 12 companies have launched initial public offerings. Several more are slated to hit the market soon.

Sebi's concerns on IPO pricing were further corroborated by a report released by CARE Ratings. Analysis of 116 IPOs between August 2007 and August 2010 revealed that "about 62 per cent of IPOs are currently trading lower than the IPO price band". Citing a survey conducted by Assocham, the report stated: "A majority of CEOs and CFOs attributed the lukewarm response to IPOs to bad pricing and weak market sentiment."

Bhave also expressed reservations on investment bankers quoting near-zero fees to bag divestment issuances. "(Investment bankers) need to introspect whether it is healthy competition," he said. Bhave added that in some issues, bankers "outbid each other (by) working for free".

He suggested a code of conduct or ethics to avoid such competition. "The industry body can do this by bringing in a certain degree of quality and behaviour," said Bhave.

In almost all the recent divestment issues, investment bankers have quoted fees of only a few thousand rupees to manage large-sized issues.

Reports suggest that six banks quoted a fee of Rs 12,500 to manage the Coal India IPO that will raise around Rs 14,000 crore.

Bhave was not alone in criticising investment bankers. Sebi Executive Director Usha Narayanan, who handles the corporate finance portfolio, was equally vocal. "What is the investment banker there for? He needs to advise promoters to leave something on the table. Some thoughts need to come from within (the industry). This is more like self-regulation," she said while talking about the challenges facing the primary market.

The Sebi chairman also asked AMBI to heed investor complaints on post-issue problems and suggest a tweaking of the system if there are repeated complaints on a particular issue. "There should be a facility on the website for investors to complain regarding post-issue problems," he said.