Appropriate price discovery in IPO: Semi-public market could be a solution
Initial Public Offerings) this week, it seems like the IPO season is back. The last year displayed a distinct split in terms of the IPO market, with the first half characterised by a sluggish pace and limited new offerings, followed by a dramatic upswing in activity during the latter part of the year. There was a decline of 30% in 2023 (INR 41,095 crore raised through 46 IPOs) compared to 2022 (INR 59,302 crore raised through 40 IPOs) and of more than 50% compared to 2021 (INR 1,18,723 crore raised through 63 IPOs). Therefore, there is bullishness in the IPO market after a sluggish 18 months.
The IPO market is usually cyclical. One of the reasons for the cyclicality is irrational price discovery at the time of issuance. In some situations, it is extremely liberal in anticipation of a big pop on listing and in some situations it is too tightly priced. There are several cases of more than 100-300% appreciation on the listing day and conversely there are many cases of negative return ranging -50 to -60%. This is due to a lack of scientific and rational price discovery in IPOs. This challenge is further aggravated for startups and very high growth companies. At times, there is a conflict between public and private market investors. Such a situation exists not just in India but across most capital markets.
The challenge of appropriate valuations for both investors and issuers is a pressing issue. This topic has been debated over a period of time and various different solutions such as book building process for price
