A case in point was the food delivery major Swiggy’s much-hyped Rs 11,327.43 crore initial public offering (IPO) this week, the response to which was tepid. Unlike earlier years, when such stocks were sold out on the first day of offering, trading dragged on.

Needless to say, the point of debate has been pricing. Brokerage firms have been divided in their opinions on Swiggy’s pricing.

Along with Swiggy, healthcare service provider Sagility India also launched its IPO this week. Electronics brand boAt and payment platform Mobikwik among others are believed to be gearing up to go public as well.

It's All About Pricing

“Pricing of stocks, or rather overpricing, is an issue that needs attention. The merchant bankers need to be more realistic in deciding the IPO price. What we have seen in the last few months clearly indicates overpricing, and that is concerning,” Vikram Sahny, MD, Sahny Securities Pvt Ltd told The Secretariat.

In October, automobile giant Hyundai Motor India’s IPO, bang in the middle of the festive season, was one of the most-watched launches. However, the auto major’s share price quickly dropped more than 7 per cent on NSE. Many analysts have noted that overvaluation led to the failure of the IPO, though Tarun Garg, Hyundai India's Chief Operating Officer asserted that price is something that is determined by investors. Ola Electric — the first Indian electric vehicle manufacturer to go public — too met with a similar fate.

The lacklustre performance of the big-ticket IPO this year, on account of possible overvaluation, have raised concerns not only for the investors, but also for the market regulator — Securities and Exchange Board of India (SEBI).

Capitalmind Financial Services, in its report last month, said that 18 out of the top recent 30 IPOs by size failed to generate gains when compared to the overall returns from the Nifty500 index.

Rajeev Gupta, a practicing chartered accountant, wrote in a blog that companies are allowed to price their IPOs based on their own valuation, which can lead to inflated prices.

However, Pranav Haldea, managing director, Prime Database, told The Secretariat that valuation of an IPO and pricing are predominantly market driven.

“On what basis do you call an IPO overpriced or underpriced? In my view, if an IPO gets subscribed even a single time, it shows that there was enough demand at that price. We need to appreciate that neither the IPO company nor its merchant bankers want the IPO to fail in generating sufficient demand, so the pricing is decided keeping this in mind,” Haldea said. “We also need to appreciate that most IPO companies still continue to have significant promoter holding, even after the IPO. As such, the promoters have most to gain if the IPO does well, post listing.”

One of the challenges has been valuation of startups and new-age companies. While the success of an IPO is not just dependent on valuation and pricing, a host of other factors, including the IPO's timing, business dynamics and the company' performance, are key determinants.  

But several analysts noted that merchant bankers need to up their game. In case the first closing price of any stock is lower than its offer price, it reflects overpricing. Naturally investors stand to lose in such situations.

Though SEBI maintained that it will not interfere in fixing the price, it has increased its watch over public issues. According to reports, the market regulator has started a system of approving a sign-off on the pricing of IPOs. The regulator has already come up with new disclosure norms for IPOs to increase transparency in the pricing process.

Failed IPOs Dent Investor Confidence

The list of misfiring IPO in recent times can dent investor sentiments. In the post COVID phase, One97 Communication, the parent company of Paytm, created a buzz when it went public in November 2021. The massive failure of the IPO — the company lost 27 per cent of its share price on the day of its listing — hit headlines. Recently, Paytm founder Vijay Shekhar Sharma said that the company's choice of bankers led to the company’s IPO debacle.

“The fall which Paytm experienced confirms unfair overpricing,” said Moneylife, a website focused on personal finance, banking, finance in a report, adding that for a fairly-priced IPO, a minor negative variance on listing is understandable.

Haldea however noted that if investors are looking for assured positive returns, IPO investing should not be considered. “Comparing IPO prices with prices one month, three months, six months or a year down the line, and then commenting on the pricing, is an exercise in futility,” Haldea said.

Merchant Bankers Role

Earlier too, SEBI had pulled up merchant bankers for off-track pricing. The regulator is now looking at setting stricter norms for merchant bankers to ensure protection for retail investors, as they increase their participation in the stock market.

This year, a number of startups and new tech companies like Go Digit, TBO Tek, Awfis, FirstCry and ixigo, among others, have listed on the stock exchanges. Valuation of many of these new age companies can be somewhat “tricky”, as benchmarking with peers is not an option. “You don’t know what the right price is, and so, determining a price band may be tricky,” an analyst said.

While the market regulator needs to ensure enhanced transparency in pricing, and merchant bankers must be more realistic when it comes to valuation, investors need to make decisions based on market dynamics and fundamentals of the company.