In my personal opinion the mechanism introduced by SEBON will bring some cheer and some confusion. Although this is a good step towards Fair Market valuation, there are too many discretionary variables. In the coming days, if not already, SEBON might need to setup an Investment Committee or Panel of Expert to approve the assumptions being consider for FPO valuation.
For example:
- Discount rate needed to calculate Discounted Cash Flow will depends on the risk adjusted return of the individual company. Discount rate will also differ from company to company even in the same industry .
- Similarly, on the Terminal Growth Rate- Terminal Value of a company that owns a limited life asset (Hydro), should and will differ from perpetual nature type business (Commercial Banks/ Insurance) .
- For 180 days average trading price method- I think it would be better if the liquidity factor of the share traded is also considered, if not there is a risk of artificially inflating or deflating the price - Pre FPO.
- Apart from the listed criteria, as an individual investors, I also hope that for the listed companies SEBON only allows Merchant Banks (Under writers) to do the valuation and not CA Firms. This way Merchant Banks will have "Skin in the game" and hopefully will not suggest an arbitrary price. In addition,I wish some minimum Credit Rating is also set as one of criteria.
As for the NRB lock stepping with SEBON for deciding the repatriation of FDI using the same principle , it would definitely be a very good start. If NRB adopts SEBON's terms then they should also allow exercising of put option if trigger price/ IRR is within the Discounted Cash Flow price cap for unlisted companies .
