Q&A: Sanjay Sharma, Deutsche Equities, India

'I don't agree with Sebi's point on pricing of issues'
Ashish Rukhaiyar
Mumbai, 15 June 2011

While the government is looking at tapping the primary market in the near future, private sector activity will be very selective, says Sanjay Sharma, managing director and head of equity capital markets, Deutsche Equities, India. Sharma, who earlier worked with Merrill Lynch, tells Ashish Rukhaiyar disclosures in the offer document are not helpful to investors, as future projections are prohibited. Edited excerpts:

How do you view the current market scenario for primary issuances? The past few months have not been too good.
If you look at the secondary markets, people are talking about FII (foreign institutional investor) flows. Though there were some inflows at the beginning of the year, net FII flows are negligible so far. One needs to consider that any offering takes time to execute. If one is looking at an IPO, it takes around six months. Even if Sebi approval is in place, it takes around a month to get things done. So, one looks for stability in the market while reviewing the trends.
I, however, think that after the 2008 crisis, investors prefer investing in deals rather than secondary markets. Earlier, very few investors wanted to wait for 15-20 days for the allocation and, so, preferred the secondary market route. Now people feel they are better off looking at deals, since it allows them to take large positions and also get management access and more time to do a detailed study of the company.
From a pipeline perspective, I don’t see too many companies coming into the market, apart from the public sector deals. The private sector will see very selective activity, partly because of the market and partly because of the Indian political and economic situation.

Sebi has prohibited fungibility of IDRs (India Deposit Receipts). Will that be a dampener for companies that could have looked at IDRs?
My personal view is that IDRs don't necessarily offer a new investor base for issuers. Only for issuers who have a large presence in India does it help in increasing the business profile for employees, customers and regulators. I am not aware of any companies considering IDR issuance.

Some of the recent listings have been unimpressive, to say the least. Even the regulator has questioned the pricing of issues. Since you head the Association of Merchant Bankers of India, do you think the regulator's concerns hold ground?
I don't think so. At the end of the day, it is the investors who are buying the paper at a particular price, and the buyers and sellers are agreeing to transact at the time of the deal.
After the listing, what happens to the stock price depends on the level of demand at the time of deal, what the performance of the issuing company is and the prevailing market sentiments. And, there should be no difference in price performance of that stock versus a similar stock in the secondary market.
Sebi has been working on streamlining disclosures and making it more relevant and easy to understand for investors to make an investment decision. There is also some talk about the fact that the ‘justification of issue price’ in the document is not relevant. I agree with this point but, while pricing of a stock depends on the future performance of the company and not necessarily past performance, given the constraint that you can’t give any future projections in the offer document, this disclosure is not very helpful to investors.

You talked about disclosures. Sebi wants the bankers’ record to be disclosed in draft documents.
I am aware that this was brought up by some investor associations. Our view as a merchant banking entity and my personal view is that the kind of disclosures being talked about are really not going to be of any help to the investor. Details about the share price performance of deals done by the lead managers may not help an investor. It would be a lot of information — typically, you have multiple lead managers in a deal and each would have some deals which have done well and some which have not — but it would really not be very helpful. Also, the share price performance does not necessarily reflect the company’s performance. Further, not all data requested would be publicly available/verifiable.

So, what are your suggestions?
We have suggested that you can give some data in terms of the amount, size and type of deals the merchant banker has done. You can give out the amount of funds a bank has helped raise over a three-year period, along with the deals and the kind of instruments and if any issue has devolved. This would give a sense to investors if the lead managers have experience of handling similar deals. The issue is still under consideration and I am not aware of any decision taken by Sebi on this.