What Ails India's IPO Market?

Is greed killing the initial public offering (IPO ) market in India?

In recent weeks, several large equity offerings, including those from reputable business houses, have struggled to hit their targets. India's stock markets have been volatile , reacting to fears of a widening global credit crunch and fears of a U.S. recession . Wharton professors and investment experts interviewed by India Knowledge@Wharton say that while markets correct themselves every now and then, their imperfections also show up at such times.

In January, the Indian primary equity market was chalking up new records. Now, suddenly, there are hardly any takers for new corporate paper.

The first casualty of the Indian IPO bubble was, ironically enough, a hospital. On February 7, Wockhardt Hospital pulled out its Rs. 676 crore ($178 million) IPO. It had exhibited all the signs of a patient on his last legs. The price band of the book-built issue was lowered from Rs. 280-310 ($7-$8) to Rs. 225-260 ($6-$7). The last date for subscription was extended.

But qualified institutional buyers , including foreign investors, mutual funds and hedge funds , applied for only 0.06% of their quota in the Wockhardt issue. The non-institutional portion (mainly for high net-worth individuals or HNIs) was subscribed 0.0048 times. Even the retail part saw demand for barely more than half the pie. It was an unmitigated disaster and the first time in recent memory that an IPO from a respected business house has flopped in India.

Close on its heels, real estate company Emaar MGF, a joint venture between the Dubai-based Emaar group and MGF Development of New Delhi, also had to withdraw its IPO in the face of low demand. The Rs. 6,500 crore ($1.7 billion) issue started with a price band of Rs. 610-690 ($16-$18). It was brought down to Rs. 530-630 ($14-$16.50) in two tranches. The last date of subscription was extended by three days, but to no avail.

"We are clearly a victim of the (secondary) market," says Emaar MGF managing director Shravan Gupta. Along with other markets around the globe, the Indian stock markets, too, have had a torrid run the past few weeks. The Bombay Stock Exchange Sensitive Index -- Sensex -- touched 21,207 on January 10, an all-time high. Barely a month later, on February 10, it fell to 16,608, a five-month low.

Wockhardt and Emaar MGF were bad enough for investor sentiment; more issues are being withdrawn or postponed. But the massively-hyped Reliance Power IPO was the most high profile casualty. This was an issue from the Ambani stable; word on the street is that the Ambanis have always made money for their investors. At Rs. 11,500 crore ($3.025 billion), it was India's largest-ever IPO.

The Reliance Power IPO was subscribed one minute after it opened. It was eventually oversubscribed 73 times and raised $190 billion. Some $100 billion of this came from foreign funds. This constitutes one-and-a-half times the total foreign institutional investor (FII) money coming into the country since 1992. "When Reliance Power lists early February, it will be among the 10 top listed companies in India," Anil Ambani, the younger son of Reliance founder the late Dhirubhai Ambani, told a press conference shortly after the IPO closed. "If we assume it lists at the issue price of Rs. 450 ($12), the market capitalization for the group will be around $100 billion."

It was not to be. Reliance Power ended its first day on the markets at Rs. 372 ($9.80). Millions lost money. The Sensex dropped 863 points in sympathy. The myth of Ambani invincibility was shaken. The Financial Times of London wrote: "It's only when the tide goes out... that you discover who has been swimming naked. Few are caught in quite such an alarming state of undress as Reliance Power."