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Sebi to review pricing of PSU offers, IPOs

Janaki Krishnan in Mumbai

The Securities and Exchange Board of India is planning to review open offer pricing of public sector undertakings.

Sebi is also planning to review pricing norms for initial public offerings in order to bring in a more efficient price discovery system.

In its recent amendments to the Sebi Substantial Acquisition of Shares Regulations or takeover code, it was decided that open offer pricings would be based on the 26-week high-low average price or two-week high-low average price whichever is higher, prior to the date of opening of the financial bids.

Prospective bidders have conveyed their unhappiness with the two-week average price rule as they feel that the stock prices will be open to manipulation.

They also feel that a last minute flare-up in prices in the run-up to the opening of the bids might be impossible to factor in their bids.

Bajpai said the watchdog is in the process of studying the scenario and ascertaining possibilities of price manipulation and whether it might prove harmful to any class of investors.

"We will have to see how we can fine-tune it depending on the feedback we get. Since the decision was taken by the Sebi board and ratified by a government notification, any decision with respect to this clause would again have to go back to the board," he pointed out.

On IPO, Bajpai said pricing continued to be a cause for concern. "It is an issue," he said. "Somewhere along the line, price discovery has not worked effectively in our case," he said.

Sebi is now thinking up alternatives to have a better system, which will throw up a more efficient price discovery.

According to Bajpai, Sebi is toying with the idea of having a flexible system which would have both fixed price and book-building attributes factored into it.

A Sebi committee on primary markets has already recommended the usage of moving price bands in the case of book-built issues so that quotes falling within the band would be considered in the final calculation.

This would work in lieu of a floor price, which is the practice currently. Merchant bankers said that valuations would have to be more realistic in keeping with the markets appetite for a particular sector.

For divestment in public sector undertakings, the Sebi board has decided on a hard underwriting clause which would provide a safety net to retail investors by protecting their initial investment for a period up to 60 days from the date of listing.

This means that merchant bankers, underwriting the issue undertake to buy-back alloted shares from the retail investors at the offer price if the price on listing falls below the offer price and in the event that the investor decides to exit.

This offer would be valid for a period of 60 days from the date of listing. The takeover code, amended recently, also decided on the higher of the 26-week high-low average or a two-week high-low average calculated back from the date the bids are opened.

This clause was introduced at the insistence of the government, which felt that the any price spurts at the fag-end of the proceedings should be passed on to all categories of investors including the government.

The markets watchdog introduced book building two years back but most of the issues sold through the book built process have quoted way below their offer prices.

Initially, issuers had to have a fixed price portion for retail investors but subsequently the guidelines were amended to facilitate 100 per cent book-built issues.

Issues, which mobilised funds through 100 per cent book building have fared no better and after the initial listing euphhoria these scrips have been quoting below their offer prices.

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