The pricing of IPOs
Abu Ahmed | Published:
December 23, 2015 22:22:45
October 23, 2017 11:56:09
Perhaps, pricing of the initial public offerings (IPOs) in markets across the world is a controversial matter. Sometimes the prices are overpriced and sometimes under-priced depending on market conditions and also on the people who decide the pricing. Sometimes, IPOs are totally stopped as in cases of market crashes or are slowed in issuance by the regulator when it sees a bear in the market. No right price is right price as in cases of other stock prices. For some, the prices are over-priced and for others, these are under-priced.
The issuer wants a high price for the IPO as he is doing business through it. By issuing IPO or selling equity to the market, the issuer has taken a stock market route for raising capital. Most of the issuers wait for an opportune moment for selling the IPOs. That moment is offered by market conditions. A bullish market will bring in more money for the issuer and the bearish market will do the opposite.
For any floatation of IPO or for any step taken towards raising capital, the public regulator's permission is needed. There comes the responsibility of the regulator in the IPO pricing. It can take credit for so-called rightly-priced IPOs, or is to accept blame from the investors for the wrongly-priced or overpriced IPOs.
Normally IPO pricing is done in two ways. One is fixed price method where prices are fixed by the Issue Manager with the consent of the regulator though investors by and large understand that the pricing under this method is done by the regulator itself. The second method of IPO pricing is letting the market price the IPO. This method is known as the 'Book Building Method'. The bidders, usually the institutional investors, bid for the stock offered for sale through IPO and the price which equalises with both demand and supply is accepted as the IPO price. In this method, the regulator oversees closely the bidding prices and also holds the ultimate power of accepting the bids or not.
However, the reality is that all over the world IPOs are bidden higher when market runs bullish, and bidden less when the market remains bearish. In other words, the right price for an IPO will be overpriced in a bearish condition just like the way the other prices of stocks are seen.
The regulator, the Bangladesh Securities and Exchange Commission (BSEC) has revised the public issue rule hitherto prevailing and brought back the much-talked-about Book Building Method in the IPOs' price discovery process with certain amendments to protect the investors' interest and plugging holes which many investors view remained opened up until now. The newly-amended Book Building Method has paved the way for foreign stock buyers to bid for the IPOs alongside the local institutional investors.
Further, the rule includes the issue manager's past performance record in the prospectus as well as making this licensed entity accountable for reporting back to the investing public as to how the issuer or the issuing company used the IPO proceeds. The rule also provides for raising the number of institutional investors for bidding from five to 12 in order to make the whole process competitive and transparent. The rule for public issue to be applied in both the methods of IPO pricing provides for making a forecast on issuer's future earnings and growth so that investors can judge about the future of the company from an informed position. The institutional investors, including the foreign ones, can subscribe or bid for the IPO up to 70 per cent of the offering with remaining percentage going to the local retail investors.
In the past, the Book Building Method was grossly manipulated by the institutional investors and manipulative elements were there in the very regulation of the regulator. The bidders colluded among themselves and quoted abnormally high prices for the IPOs taking advantage of the bull runs of 2010. Some of those IPOs became junk stocks simply. Even now, there is no guarantee that pricing of the IPOs under the Book Building Method will not be manipulated unless the regulator keeps the whole process of bidding under its watchful eyes. No method is fault-free; yet we believe that, in a normal market condition the Book Building Method is a better one. We hope, this time investors will not complain about overpricing of the IPOs. By opening Book Building Method for IPO pricing the regulator did a right thing.
The issuing companies which so long remained reluctant or on the sidelines as to whether to come to the stock market for listing should not have much complaint about the price of their equity. For long, they complained why they should come for stock market listing when they do not get the right prices for their stocks. Now, there should be no such complain and we hope more fundamentally strong companies will come for stock market listing.
The writer is Professor of Economics, University of Dhaka.