In India’s primary market, shares are valued on the basis of a free pricing mechanism, under a method called “book-built issue”. There is no role played by any market body or regulator SEBI in the fixation of price of primary market securities. When a company files for an IPO, it hires a merchant banker in an advisory role, to help with the process. One of the functions performed by a merchant banker is to conduct due diligence on the company and then help it fix the IPO price.How the company arrives at a certain share price is part of the disclosures made in the offer document of the public issue. The parameters taken into account for the same are also outlined in the document. Traditional valuation parameters like Price to Earnings Ratio, Price to Book Value Ratio etc. are not useful to assess the fair price of share, for the new age digital companies. For the plethora of IPOs of new age fintech and digital companies that are coming to the primary market, the merchant bankers have the luxury of justifying the sky-high prices of the issue, based on far-fetched parameters.If the price of a public issue is determined based on the demand for shares among prospective investors, the IPO is termed as a “book-built issue”. Here, investors are provided with a price band and range within which they can place their bids. Basically, market forces determine the price of a company’s share in a book-building process. However, there were some “book-built issues” where the difference between the higher price band and lower price band was just Rs 1 or 2, making a mockery of the “price discovery” process.The shares allotted in biggest IPO of India, that of Paytm, just got listed on the bourses at a whopping 25% discount to the issue price. The shares issued at Rs 2,150 per share in the IPO, are currently trading around Rs 1,600 per share in the secondary market.Incorporated in 2000, One 97 Communications Ltd (the parent company of Paytm) is India’s leading digital payment ecosystem for consumers as well as merchants. As of March 31, 2021, the company has a 333 million client base and 21 million registered merchants’ base. Out of the 333 million total customers, 114 million customers are annual transacting active users. For the financial year ended 31st March 2021, One 97 Communications Ltd posted a revenue of Rs 31,868 million and a net loss of Rs 17,010 million. Paytm mainly earns money via transaction fees and take-rates charged to merchants based on the percentage of GMV. Though Paytm today has three main business verticals – payment services, ecommerce & cloud services and financial services – payment services contribute the lion’s share to its revenues.The IPO size was Rs 18,300 crore, dubbed as the largest IPO in India so far! Rs 10,000 crore was offer for sale by the existing shareholders and Rs 8,300 crore being fresh issue by the company. The Paytm IPO’s price of Rs 2,150 per share valued the company at a huge $20 billion.Pre-IPO share holding pattern of Paytm is as below.Shareholders – ShareholdingVijay Shekhar Sharma – 14.67%Ant Group (Alibaba Gr) – 29.71%SoftBank – 19.63%SAIF Partners – 18.56%AGH – 7.18%Berkshire Hathaway – 2.76%Sharma Holding company – 5%Total – 100.0%Out of the Rs 10,000 crore offer for sale by the existing shareholders, China’s Ant Group and Alibaba Group offered Rs 5,488 crore worth of shares in the public issue. Ant Group/ Alibaba Group invested roughly $880 million in 2015, for their stake of around 30% in One 97 Communications Ltd. The biggest beneficiary of the high IPO price was thus the Ant Group/ Alibaba Group and not the founder Vijay Shekhar Sharma. Ant Group/ Alibaba Group’s 30% stake was valued at $6 billion in the IPO, against their original investment of less than $1 billion, an appreciation of about 500% in six years.The investors who applied for and got shares allotted in the Rs 18,300 crore mega IPO are thus the losers. They would have lost about Rs 5,000 crore of their investments and the losses are counting. ( V Venkateswara Rao is an alumnus of IIM, Ahmedabad and a retired corporate professional.)
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