By Chandeepa Wettasinghe
A top investment banker said the capital market experts pointing fingers at investment banks, for killing investor interest with improperly priced initial public offerings (IPOs), must have done so for fun, in order to create controversy.
“Just for the fun of doing it they are saying, to create controversy,” NDB Capital Holdings Limited Chairman Vajira Kulatilaka, who heads the investment banking and stockbrokerage activities for the NDB group, told Mirror Business recently.
At a recent capital market conference held in Colombo, leading capital market experts said all of the five IPOs that came to the market over the last 12 months are trading below their issuing prices and said this has been happening for a long period, with some IPOs being valued at many multiples of their intrinsic value by investment bankers.
They said this is happening since the investment bankers gain higher fees for higher valuations and most stockbrokers are also keeping quiet instead of issuing ‘do not subscribe’ reports, since they don’t want to offend their friends in the close-knit Colombo capital markets fraternity.
Two of the five IPOs were managed by NDB Investment Bank (NDBIB), which is one of the most active investment banks currently in the market.
Kulatilaka, who was also the former Chairman of the Colombo Stock Exchange, however said IPOs cannot be measured by short-term price fluctuations and that investment bankers take a look at the intrinsic value of a company and how it would value over a period exceeding two years.
“Look at it fairly. There’s a party who had worked hard to get the company to that level. So what we can do is intrinsic valuation, what we see as the long-term value of a company. Pricing is purely demand and supply,” he added.
Kulatilaka cited the success of the largest IPO in Sri Lanka, Dialog Axiata PLC, which raised Rs.8.5 billion in 2005, which NDBIB brought to the market priced at Rs.12 but went up to an all-time high of Rs.29.75, creating wealth for investors. Twelve years after the IPO, the Dialog stocks are priced above the initial issuing price at Rs.13.90.
Kulatilaka, referring to the IPOs in general, admitted that some of them have been brought to the market overvalued and have not generated sufficient returns for investors.
He also agreed that some IPOs have come into the market at many times their value due to conflicts of interest between the investment bankers who managed the issues and the companies going public.
However, he said that the stock market was not being undermined by improperly priced IPOs but due to the political climate in the country and external shocks.
He added that the challenge of investment bankers is to grapple with the consequences of these events and to price IPOs accordingly.
“If next day, the American interest rates go up or if there’s a no-confidence motion or there’s an election the government loses, things can go wrong but long-term, with all these things, will they (IPOs) grow? That’s what we look at,” he said.