InvestorQ : Can you tell me what the SEBI chairperson has said about the regulator getting involved in pricing of digital IPO?
Chandralekha Desai made post

Can you tell me what the SEBI chairperson has said about the regulator getting involved in pricing of digital IPO?

NISHA Nayak answered.
2 weeks ago

At a recent speech made by the SEBI Chairperson, Madhabi Puri Buch at the FICCI Capital Market Summit she underlined that the regulator had no business to get into IPO pricing. In fact, ever since digital IPOs gave a poor performance post-listing in 2021, there have been questions about SEBI regulating price setting process. However, Madhabi Puri Buch has clarified that the capital markets regulator (SEBI) had no reason nor any intention to get into pricing. That was best left to the issuing company and the investment bankers.

However, Madhabi also underscored that SEBI would make deeper disclosures mandatory, although it would still leave the pricing to the discretion of the issuers and the investment bankers. She admitted that there was need for more granular disclosures by companies. This was all the more necessary when there was big gap between the pre-IPO placement valuation and the IPO valuation. In such cases, Madhabi suggested that SEBI will ensure that the issuing companies gave convincing justification for such sharp gaps in valuations.

Madhabi also tried to explain the issue of granular regulation with an illustration. For example, if the start-up had sold shares at Rs100 per share to PE funds and then did the IPO within a short time at Rs450 per share, then there was a question. The onus in such cases would be on the company to explain the circumstances under which such a huge increase in the valuation could be justified. However, she also added that if the company had convincing explanation, then the regulator had no reason to question the pricing.

There have been cases of unsuspecting investors getting into overpriced IPOs but the SEBI chairperson underlined that there are enough provisions in the SEBI rules to protect the interests of small investors. To an extent, these investors must also exercise restraint and double check with their advisors before investing. SEBI is analysing IPO data to evaluate the breadth of retail participation in such issues and how some of the disclosure norms could be made more elaborate. It may not solve the problem, but that is how much SEBI can go.

The moral of the story is that the regulator will not get into pricing detail, except of making more disclosures and justifications mandatory. SEBI would insist on more elaborate and transparent disclosures as well as price justification when there was a huge gap in valuations. SEBI is right. It cannot get into pricing issues. However, such issues are best solved by the market forces as we have seen the pressure in the last few months. It may make the road tougher but in the process will also make it safer for retail investors.