What Ails India's IPO Market?

Reliance Power's Make-Good Gesture

In a post-listing development, Reliance Power has announced that it will issue bonus shares to its investors; however, the promoter group will not be entitled to these shares. Reliance Power has since risen to more than Rs. 400 ($10.50). But analysts read into the bonus proposal a tacit admission that the pricing was indeed too "aggressive" in the first place.

"The pricing of an IPO is dependent on three factors -- the state of the capital markets , sector fundamentals and company performance," says S. Ramesh, chief operating officer at Kotak, one of the leading investment bankers in India. "One needs the tailwinds of all these three to achieve good IPO response and post-listing performance." He says what is important is a stable market; if you are on a rollercoaster ride, all bets are off.

Most merchant bankers agree. And there is no disputing the fact that, if the market hadn't tanked, all these issues would have done very well on listing. The reason why so many were disappointed in the performance of Reliance Power was its showing in the gray market in several cities of the western state of Gujarat. This unofficial and illegal market trades in shares even before the IPO and allotment. (The final settlement is when the scrip lists.)

Reliance Power changed hands at Rs. 900 in January. When the market fell in February, it came down to Rs. 600 ($24). Even at this reduced rate, it commanded a premium of Rs. 150 ($4) over the issue price of Rs. 450 ($12). When it listed at less than Rs. 400 ($10.50), these investors -- mainly high-net-worth individuals -- ran up huge losses.

Many investors had borrowed at high interest rates to buy Reliance Power shares. A back-of-the-envelope calculation shows that the share would have to list at Rs. 600 ($24) for them to break even. What happened was a disaster for these speculators . Many are refusing to pay up. And there is turmoil in the illegal betting shops in cities like Rajkot and Baroda.

Irrational Exuberance, Indian Flavor

Promoters are a shade more candid. "It takes two hands to clap," says Ravi Ramu, chief financial officer of Puravankara Projects, a real estate developer in Bangalore. "If you ask about the greed of merchant bankers and promoters, you should also talk about the irrational exuberance of investors. Do they rush to invest in an issue simply because it rained harder that day? In the euphoria, they forget to look at the fundamentals."

Ramu and Puravankara must have a feeling of déjà vu. When Puravankara floated its IPO last August, the ripples of the U.S. subprime crisis were hitting Indian shores. Puravankara had to reduce the price band by 20% from Rs. 500-525 to Rs. 400-450 and extend the issue by three days. It finally did garner adequate subscription. But on the day it listed, it closed at Rs. 362.80 against the issue price of Rs. 400 ($10).

Puravankara is not a typical case. Most IPOs have been listing way above the issue price. Power Grid closed its first day at Rs. 100.70 (against an issue price of Rs. 52). Other such runaway examples include Mundra Port Rs. 440 (Rs. 961.70 issue price) and Power Finance Rs. 85 (Rs. 112.60 issue price).

"When things sell, everything sells," says Vivek Suchanti, managing director of Concept Public Relations. Concept provides public relations services for IPOs, which basically means hard selling the issue to the media.

"Bankers and promoters sell anything at any price on the story going ahead," he continues. "Investors look at gray market prices and buy. This is also true of the 'sophisticated' investors such as FIIs and hedge funds." Says Somaiya of IGF: "Emaar MGF, Wockhardt Hospitals and Reliance Power were absurdly overpriced. Euphoria was created which was not supported by fundamentals."

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