With the current madness of the IPO market, I am reminded of something I wrote in 2012. Here is that piece.

IPO and stock investing are almost synonymous to the investor. Investors view IPOs as the most preferred entry point into the stock market. The reasons are historic. IPOs had a history of delivering great returns if the investor stuck to quality companies. But that was in a different era before liberalization started in 1992.

Pricing in the pre-liberalization era was fixed by an agency called CCI (Controller of Capital Issues), which was an arm of the Government. This agency always forced companies to underprice issues. Therefore, investors benefited as the IPO issues of well-managed blue-chip companies were always below the fair value. But liberalization changed all that, and the game changing event was the abolition of the CCI and the advent of free pricing of issues. Since then, IPOs have become a game of beguiling investors over the past two decades. Power shifted from the investor’s hand to the issuer.

Post abolition of CCI pricing, power shifted to the merchant banker. Companies chose merchant bankers on the basis of who offered to raise money at the highest price. Merchant bankers built their businesses on their ability to market issues at higher valuations. ‘Hype’ was the most commonly used marketing tool and investors were drawn in to invest in IPOs at high valuations.

As an investor who has watched the entire gamut of IPO rigging over the past two decades, I believe that SEBI is well-placed to clean this mess. All it needs to do, is to ignore the merchant banking industry’s lobbying and put investor’s interests above all else.

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