10 October 2011

Merchant bankers and investor returns

I have seen many reports trying to crucify merchant bankers about the poor returns from companies (with which they were associated) which have in the recent past gone public. See for instance this post. SEBI also now expects bankers to disclose the performance of the companies they brought to market. The broad trend of the articles is that merchant bankers have helped mis-price the issues given that the market price has falled dramatically since the IPO debut. In fact, the opposite is more true. A banker who leaves as little on the table for potential investors as possible does the most justice to the company and its investors. Keeping the IPO price low is bad for the company and for the economy - and only helps merchant bankers who escape the risk of underwriting as a badly priced issue will not require underwriting commitment. It is therefore in the interest of the banker to mis-price the issue on the lower side - rather than the upper side. A high price in an IPO means (besides less dilution of existing investors) that more money goes from those willing to put their risk capital in the market for capital gains - and into the coffers of a company and productive assets.

Thus assertions like "Sebi should take a more stringent view by not allowing fund raisings it thinks are not justified. The risk factors are telling enough in a company’s prospectus." could not be more wrong. It is not SEBI's job to price an issue or to stop it because it is 'overpriced'. In fact under-pricing it would be wrong and a sure exhibition of conflict of interest. Finally, the entire market, particularly small and mid-caps have fallen dramatically because of the second world-wide crisis and high interest rates charged by banks - this fall has nothing to do with merchant banks.

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