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Stock valuation is a function of complex and elaborate market dynamics, and investors always "have the choice to reject an IPO" if they believe an issue doesn't give them valuation comfort, Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey tells ET's Reena Zachariah and Sruthijith KK explaining the rationale behind the seemingly lofty market capitalisations of several new-age, high-growth businesses. Pandey uses the analogy of rapid stock movements multiple times a day to argue that the fundamentals of a company do not change with such a frequency to drive home the point how market dynamics, often beyond the immediate bailiwick of the scrip, dictate its value. Edited excerpts:
India has seen a record number of IPOs this year, but many of them were OFS (offer-for-sale). The chief economic advisor, too, addressed this issue recently. Historically, IPOs were primarily about raising capital for companies' requirements. What is your perspective?
Equity can be infused into a company at different stages of its growth. Investors help build a company to a certain level, and at a later stage, the company can raise further capital or the investors can divest part of their holdings. Value unlocking can, therefore, occur at various stages, and listing is one such stage. In new-age companies, where uncertainty is high, private equity takes significant early-stage risk because there might not be bank capital available. Some of these ventures fail, some succeed. Once the company is built up, it is perfectly reasonable for early investors to partially exit through a public offering and enable wider public participation. There is no contradiction between a private equity investor exiting and the broader purpose of the primary market. Private equity invests risk capital across many companies; high returns in some cases help balance failures in others. While one company may give high returns due to success, there may also be failures that need to be compensated. You can bring a greenfield company and raise capital, or you can combine a fresh issue with an OFS, or even have an entirely OFS-driven listing. For example, in the LIC IPO, the government only diluted 3.5% of its stake because no fresh capital was needed. For a company to list, shares must either be issued or sold-otherwise the primary market cannot function.
New-age companies have been receiving staggering IPO valuations, with some stakeholders expressing concerns. We understand that Sebi typically does not intervene in valuations...
If an investor is concerned about valuation, they are entirely within their rights not to subscribe to the issue. The whole purpose of disclosures is to provide enough information for investors to make informed judgments. Not everyone has to agree with a company's valuation-these are judgment calls based on expectations of future growth and analysis of available data. I can assure you that the prospectus contains extensive material for such analysis. Sebi's message is for investors to become informed. Our role is to ensure that investors have the information they need. In fact, we are planning further reforms to introduce a concise summary of key points for easier comprehension. Fund managers, who invest crores of rupees, certainly do not do so without due diligence. During roadshows, they actively question companies and merchant bankers about the basis of disclosures made in the offer document.Investors always have the choice to reject an IPO, skip it, or criticise its valuation. We cannot restrict people from expressing their views-public scrutiny is integral to the public issue process. If we believe in market functioning, this is exactly how markets function. A company's fundamentals do not change ten times a day, but its stock price may move ten times a day. Prices adjust dynamically based on varied information-not just about the company, but also the broader economy and global developments. Markets can sometimes take extreme positions and then correct themselves quickly. A sharp fall in the index does not necessarily reflect a corresponding change in fundamentals. Investors need to develop greater sophistication and avoid reacting impulsively to every piece of news. This is why we consistently emphasise long-term investing, which is far more effective than making decisions on a day-to-day basis.
Recently, concerns were raised around an IPO where the founder had received shares through a preferential issue just three months before the IPO at a price significantly lower than the IPO price. This led to questions about why investors were being offered shares at a much higher valuation. Is Sebi concerned about such practices?
I prefer not to comment on this specific case. We operate in a disclosure-based regulatory regime, and the matter you mentioned was fully disclosed. Some stakeholders questioned it, while others provided explanations-and that is how a disclosure-driven market is meant to function. If we view this as a systemic issue, we will deliberate whether there needs to be a defined period within which these types of transactions should be avoided prior to the filing of the offer document. While legally permissible from their perspective, we have to see the unintended consequences of such actions. Any regulatory response must therefore be thoughtful.
We have seen a record level of FPI outflows. What, in your view, is driving this? What feedback have you been receiving from FPIs?
One we received and were able to address was related to the Press Note 3 threshold. Initially, the limit for requiring granular disclosures was ₹25,000 crore, which we later increased to ₹50,000 crore. FPIs had difficulty complying with these granular disclosures because they often operate as pooled vehicles with constantly changing investor compositions. Providing continuous, consistent disclosure is challenging, especially given differing regulations and privacy constraints across jurisdictions. Increasing the threshold has eased concerns to some extent, but many FPIs still worry about eventually crossing the ₹50,000 crore limit-so that problem remains. Another issue is the time taken for FPI registration. Although we have made efforts to shorten the process, our regulatory framework requires registration at the fund level rather than at the investment manager level, unlike many other jurisdictions. This means an investment manager with multiple funds-sometimes even hundreds-must register each fund separately. Registrations are handled through custodians, which leads to significant back-and-forth. Documentation is also a problem. Even though we allow the use of Indian digital signatures and digital submission of documents, many FPIs continue to send physical, notarised documents. Every update requires the same process, causing delays. Our goal is to integrate digital signatures fully across regulatory bodies, including with the RBI, so that KYC and documentation can be streamlined. If we succeed in this, FPI registration could be completed within days which today takes about a month. FPIs have also highlighted the absence of a closing auction mechanism, which they say contributes to tracking errors for passive funds. India is currently the only major jurisdiction without such a mechanism. We are committed to introducing it. Another point raised relates to settlement and netting requirements. Under RBI rules, FPIs must settle trades on a gross basis. Given that we do not allow same-day trading in the same security, there may be scope for permitting netting across different securities. We intend to engage with the RBI on this to explore possible solutions.
Is there a case, as in some other jurisdictions, for adopting fund-manager level registration instead of requiring every single fund to register?
At this moment, we have problems around that.
Is that due to money laundering concerns?
Yes, broadly. Because we have a system in place where every fund is required to have a PAN. Currently, it doesn't seem feasible, but we will have to see.
The first committee you established was tasked with examining conflict-of-interest matters involving Sebi members. The committee has now submitted its report. What are your thoughts on its recommendations?
I would not like to comment on the report at this stage, as it will first be placed before the board for consideration. Broadly, however, I believe the committee has made well-reasoned points. They consulted a wide range of stakeholders and, in my view, produced a balanced set of recommendations that will help us move forward. We need to prepare for the future. Certain concerns had been raised publicly, and we needed to address them upfront, find solutions, and evolve our institutional framework. We cannot remain stuck up in something. This was an issue in the media space, and we chose to confront it directly. I believe many of the recommendations are useful-they enhance transparency, reassure stakeholders that systems to manage conflicts of interest are in place, and ensure that such matters are properly recorded.
Since this was the first committee formed to tackle conflict-of-interest issues, observers might conclude that your initial mandate was to restore the institution's credibility-especially given concerns that arose during the previous chairperson's tenure. Would that be a fair assessment?
I would not like to comment on my predecessors, certainly not in a negative manner. I would instead emphasise that over time-through successive chairpersons, Sebi employees, and the active cooperation of market participants on various committees-Sebi has evolved into a strong and resilient institution. It has consistently responded to diverse challenges in the past, and I have great respect for the contributions of those who came before me. However, at times certain areas may not have received as much focused attention. When I joined, I felt this was one such area where greater clarity-both internally and externally-would be beneficial. We had no intention of allowing any room for insinuations or doubts; transparency is the best way to avoid that. The committee's recommendations, in my view, deserve serious consideration. We should take them to the board, deliberate thoroughly, and move forward in strengthening our institutional framework.
What are your thoughts on unbundling the charges of clearing corporations? Has the committee submitted its report on the issue?
I don't think the committee has submitted the report yet. The issue originated from concerns about whether clearing corporations have adequate funding. Clearing corporations are critical because all settlements flow through them, and historically they have been funded by their parent, which is stock exchanges. Earlier, they were part of the exchanges, and later they were separated to ensure independent governance, though they continue to operate as subsidiaries. The idea behind unbundling is to separate charges given to exchanges, so they are split between exchange services and clearing services. This would allow clearing corporations to fund themselves and encourage exchanges to invest in necessary technology, given that the exchange and clearing corporation remain closely interconnected-almost like conjoined twins. A complete separation may not be necessary, especially since global markets operate under both models. Therefore, it is not that the model per se is a big problem for us. While a complete reconstruction is not feasible, unbundling could help determine the necessary clearing charges needed to make it viable and self-funded.
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