Knowledge @Wharton
Clearly, it didn't help the Reliance Power IPO that the Sensex lost more than a fifth of its market capitalization 
between January and February. Wharton management professor Saikat Chaudhuri sees nothing wholly unexpected in these developments. "The market periodically has to adjust," he says. "If there is a bull run, the market usually pulls back to an extent, especially now because there is so much uncertainty surrounding the credit crunch."
deals are also stuck. He doesn't see any respite until some clarity emerges on the actual size of the credit crisis. "Until this is resolved -- say [for example] people know that the top 10 banks will take a $50 billion hit -- the market will continue to be jittery," he says. "Short-term investors are very nervous. They are not sure if the problems associated with the credit crunch have been adequately addressed and if the market has all the information it needs."
Fears about a possible U.S. recession are also stoking the uncertainty in the Indian markets, says Chaudhuri. "If the U.S. is headed for a recession, then of course a lot of growing firms in India, particularly those in the IT sector, are going to take a bit of a hit because they are still very heavily dependent on the U.S. market."
Franklin Allen, a finance professor at Wharton, says primary markets will continue to be "tricky" until the markets settle down. "When you have so much volatility [in the secondary market] -- it's up 2% one day and coming down 2% the next day -- it is very difficult to do these primary market operations; that is the underlying problem," he says. "This happens also in developed markets when there is volatility."
"Now, if I were an investor, I don't think something like Reliance Power should have taken a hit," says Chaudhuri, pointing out that India is power-deficient and its infrastructure sector is "growing very well. In the worst case, if India's growth needs were to come down a notch, its power needs will still have to be met."
While the fall in the Sensex and the air of pessimism hurt the Reliance Power listing, many people point to high valuations as a reason for the IPO market going bust. "The bull frenzy led to unsustainable valuations," says Prithvi Haldea, chairman and managing director of Prime Database, which tracks IPOs. "Retail investors feel they have been cheated," says Kirit Somaiya, president of the Investors' Grievance Forum (IGF).
"It's just a question of timing," says Chaudhuri. "It is fine to be greedy, but you have to do that when the market is rising. I am not making a value judgment, but everybody is always trying to extract the most that they can at any point in time. That's their natural quest." He says it may have been a good idea for some promoters to postpone their IPOs until things got clearer on the credit contraction front.
Sudip Gupta, professor of finance at the Hyderabad-based Indian School of Business (ISB), says, "What is interesting and important is what to expect now when things look relatively bad worldwide. The informational cascade effect comes in here." He explains that the first few investors in an IPO bring in bad news, forcing a price cut, scaring away potential investors, and "thus generating an informational cascade."
Gupta says that if the IPO's price cut is "too much," investors may start to wonder "why the firm is so desperate for cash." In other words, he says price cuts don't necessarily work. Gupta of Emaar MGF says the company will come back to the market in three to six months, when he hopes it will be less volatile.
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