Is Primary Market set for another record year?

Published on Friday, December 29, 2023 by Dilip Davda

The bubble may burst soon

While secondary markets have bided adieu to Calendar Year (CY) 2023 with a net all-time high during the final week, the primary market too joined the bandwagon with a record of 59 mainboards (excluding Adani Enterprise FPO) IPOs and 182 SME IPOs taking a total tally to 241 IPOs against 150 IPOs for CY 2022 that included 41 mainboard and 109 SME IPOs.

While mainboard IPOs attracted mixed responses, SME IPOs fell prey to vested interest games that had a link with Dubai for funding. If SME operators were to be believed, most of the merchant bankers, market makers, and promoters, were making rounds to Dubai every week. Some media also reported on this Dubai link that were pumping funds into SEM IPOs and with a great surprise we also marked hefty subscriptions of over 300 times for many recent IPOs.

Well, according to primary market operators, the good going may continue for a while, but hand-in-glove operations from vested interest parties are luring investors for SME IPOs more than the mainboard IPOs. This is simply because of the lot size of SME IPOs and any listings with premium bring huge returns compared to mainboard IPOs.

As SEBI is not looking at or approving the offer documents for SME IPOs, liberal standards are followed by the exchanges with many compliance matters being ignored. The first and foremost thing is the non-availability of offer documents on the concerned websites even after announcements of the IPOs. While checking on this aspect, many merchant bankers argued on secrecy about their mandate which may get hijacked by other competitors. But we do not find such an anomaly as far as mainboard IPOs are concerned.

The lead managers have uploaded draft prospectuses right from the day of the announcement of filing. We miss action on this aspect from merchant bankers for SMEs who are taking benefits of some relaxations given, but what is surprising is that even after the announcement of the IPO opening, we do not find offer documents on merchant bankers&rsquo, designated exchange or the company websites.

The other big unplugged matter is that of merchant banker itself of their group company having mandate as market making for the IPOs they handle and this leaves a major grey area of price manipulations post listings. This needs to be attended on an SOS basis by SEBI being the prime regulator that has up the sleeve many reforms for the primary and secondary markets.

According to seasoned observers, filing of draft documents is to be followed by availability of the same on merchant bankers' website as well as the issuer company's website. This will help the concerned entities to track the same in time to get themselves more informed. Approval of SME Offer documents and price band advertisements are published/uploaded with many mismatches and suppressed information on valuation parameters.

We have witnessed the filing of addendum or corrigendum for such shortfalls many times in the recent past. This kind of anomaly needs to be curtailed. Filing of offer documents of SME IPOs on the SEBI website though voluntary, is done at the behest of merchant bankers. In general, we do not find all SME offer documents filing of SEBI web.

Primary market investors are pinning hope for stricter norms and plugging of loopholes to bring more transparency. I have given such information in my reviews to alert the concerned parties, but nothing is happening in this regard. Will SEBI revise rule frames for the SME IPOs in particular? Secondly, the SME IPO pricing and lots are defined to have some mismatch as the last and the first number of price band table is being used to their benefit by the merchant bankers. For example, if an SME IPO is priced at Rs. 50 then some go for a market lot of 3000 and some for 2000. This anomaly needs to be rectified immediately and let the following number start with Rs. 51 and so on and the revision of this needs prime attention. For easy understanding, the price band table approved by SEBI is given below.

As per SEBI guidelines issued in May 2012 for SME listing and trading purposes, the lot size has been framed under the conditions laid down hereunder:

After the first line all following lines' the first figure may be hiked by Re. 1 to solve the lot confusion. We urge that the market-making mandates should be abandoned for the merchant bankers of their group companies to arrest chances of manipulations. Well, the primary market party may continue as long as the listings are done on a positive note, but once the table turns and the listing happens at a discount, SME IPOs will be the prime sufferers due to their lot size. With the good going, though many good fundamental companies have entered the fray, few companies entered just to get the benefit of hype created and wash their hands in the flowing rivers. Some observers are also smelling some scams in SME IPOs which may be unearthed shortly.

In a lighter vain, according to the market operators, with the madness seen in SME IPO oversubscriptions, many mainboard aspirants are thinking of going for listing via SME Route. As we have seen in the past boom for primary markets with mini steel, mini cement, leasing, aqua, and plantations companies in the past and most of them are missing from the listed companies, similar history may repeat as we are seeing many companies in the same segments i.e. logistics, IT, grocery, infra are flooding the markets. Investors should not become the scapegoat and must study the documents and also consult their financial advisors before making any primary market investment decisions. Let the transparency be in place on all fronts.

If the primary market circles are to be believed, CY2024 may see overall 320+ IPOs including mainboard with the continuation of the bull run and euphoria of listings gains. While SEBI has curtailed post post-IPO closure time frame, it needs to extend the pre-IPO time frame and ensure the availability of offer documents at least five working days before. If possible, let there be auto default closure of IPO on the following day of oversubscription to arrest multiple applications for oversubscribed IPO on the last day of subscription. Let all merchant bankers as well as corporates update their websites for investor-related information soon after filing draft offer documents.

No doubt, more corporations going public with their fundraising exercise is a good sign for the national economy and growth, fly-by-night entities should not take undue advantage of liberal policies.

Happy investing in IPOs for CY2024 to all.