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March 27, 2006

"The Pre-IPO Pricing Party"

Business Today has an article on how companies on the IPO path strike deals with financial investors - like PE firms, hedge funds or FIIs - to "discover" their IPO pricing a few months before the actual issue.
Like many of its predecessors, (M&M Financial) the tractor maker's NBFC too had placed a chunk of its shares with a private equity player at the pre-IPO stage. One-and-a-half-month before the bidding for sale of shares actually started, Copa Cabana, a Mauritius-based wholly owned investment arm of Chrysalis Capital, made an entry into the Rs 400 crore M&M subsidiary by buying out 4 per cent equity at a price of Rs 190 per share. When the issue did finally hit the market, guess what was the price band 'discovered' by lead managers Kotak Mahindra Capital Co. and ABN Amro Securities (India), via the much-touted book-building process? Rs 170-200 it was, making the ChyrsCap subsidiary's entry price the beacon for pricing of M&M Financial's IPO. Welcome to the primary market's best kept secret pertaining to IPO pricing: Price discovery actually takes place a couple of months before the book-building process.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.