How much role does an investment banker play in deciding the issue price of an initial public offer?
Not much, say bankers, as it is done after consultations with the company officials who, at times, could be too demanding. But ask independent experts and they are quick to point out that the banker's fee is directly linked to the issue size.
So, who exactly should be blamed for poor performance of the shares after listing?
The question assumes significance when seen in the backdrop of the performance of all companies that made their debut on the stock exchanges since January 2007, the time when the term 'bull run' acquired new dimensions and there was a frenzy amongst companies to go public.
Since January 2007, the top 10 investment bankers have collectively taken public a total of 239 companies and two-thirds (157 to be precise) are currently trading below their issue price (see table).
Further, only 75 issues have managed to beat the 30-share Sensex since the day of listing, with the remaining 164 underperforming the benchmark index.
The methodology adopted here is simple.
The top 10 investment bankers based on the number of issues managed were identified and the performance of each of their issues was evaluated.
The performance of each banker was assessed on two parameters -- number of issues trading below/above issue price and relative performance of each issue against the benchmark Sensex.
For instance, if a stock was listed on May 23, 2007, then its performance was compared to the Sensex movement between May 22, 2007 and May 20, 2011.
Interestingly, the Securities and Exchange Board of India wants investment bankers to disclose their track record in the draft document.
This, according to the regulator, will help the investor evaluate the track record of the bankers and take better-informed decision.
| TOP 10 UNDERWRITERS (For IPOs since Jan 2007) | |||||
| Out- perform Sensex |
Under- perform Sensex |
Below issue price |
Above issue price |
Total | |
| Enam Securities | 16 | 30 | 30 | 16 | 46 |
| Kotak Mahindra Cap | 15 | 31 | 30 | 16 | 46 |
| ICICI Bank | 7 | 18 | 15 | 10 | 25 |
| SBI Capital Markets | 7 | 17 | 16 | 8 | 24 |
| JM Financial | 5 | 16 | 15 | 6 | 21 |
| Edelweiss Capital | 4 | 15 | 16 | 3 | 19 |
| Morgan Stanley | 3 | 12 | 11 | 4 | 15 |
| Keynote Corporate | 6 | 9 | 8 | 7 | 15 |
| Citi | 8 | 6 | 6 | 8 | 14 |
| IDFC Capital | 4 | 10 | 10 | 4 | 14 |
| Total | 75 | 164 | 157 | 82 | 239 |
| (Figures in numbers) Source: Bloomberg Compiled by BS Research Bureau | |||||
How
Bankers say their performance cannot be judged on the post-listing performance of the stock.
Once the stock is listed, it is exposed to market conditions and the company decisions in which the bankers have no role to play, they add.
"It is not the case that all issues are always trading below their issue price and there are several windows for investors to exit above the issue price," says S Vishvanathan, managing director, SBI Capital Markets.
In the long term, many issues trade above the original issue price and the stock price would reflect the company's performance and future prospects, added Vishvanathan.
Independent experts say such a trend sends out a wrong signal among investors, especially retail, who start thinking the stock market is not a safe place.
Some money should be left on the table for investors, they say.
"If two-thirds of the IPOs are trading below issue, it does not instill confidence among retail investors.
"There is good appetite for public issues, but issuers should leave some amount of money on the table," says A K Narayan, president of the Tamil Nadu Investors' Association and member of Sebi's primary market advisory committee.
"There is a need to bring quality companies to the market and give 10 per cent discount to retail investors in all public issues."
Others feel bankers have no role to play in the shares once they are listed on the bourses, but should be pulled up for any IPO process-related malpractices.
"Disclosures are the most important part and bankers should be penalised for any wrong-doing in this aspect," says Prithvi Haldea of Prime Database.
"Bankers can be held responsible only for complaints related to allotment, refunds or IPO procedures. Share performance, post listing, has nothing to do with the banker."
Vallabh Bhanshali, Chairman, ENAM group, said, "For the last two and a half years, we have seen excess volatility in all markets including equities, currencies, commodities and even in countries.
"In such a scenario, the post-issue performances of IPOs are bound to be influenced by the general market trend."
An investment banker said on the condition of anonymity that "it is difficult to say who takes the pricing call -- the company or i-banker as several PSUs are influenced by the broader market and many have not done well.
PSUs are supposed to leave something on the table for retail investors."
