It?s been a dull year for the primary market and the scenario is not going to improve anytime soon, says Sanjay Sakhuja, CEO of Ambit Corporate Finance. In an interview with Ashley Coutinho, Sakhuja says weak IPO volumes and lacklustre deal flow together with high fixed costs are proving to be a challenge for the merchant bankers in India.

It was a lacklustre year for the primary market. Do you see things improving?

As long as there is uncertainty in the secondary market, the primary market will continue to be lacklustre. The next three to six months will be challenging for a variety of reasons. Obviously, what?s happening in Europe is a matter of concern. We don?t know for how long the situation will remain like this. It?s something that will unravel as we go along.

Apart from the crisis overseas, we have our own issues back home. High interest rates, inflationary pressures and policymaking constraints have become a drag and we have a slowdown staring at us.

Several stocks that made their debut this year are trading well below their issue price. Is pricing responsible for this?

If the secondary market is in turmoil and stocks across the board are going down, you would expect a new issue to trade below par as well. Yes, pricing is partly responsible for the poor performance of some of these newly listed scrips. But overall you have to realise that the equity market as a whole has been in some pain. For example, take the case of L&T Finance. The company was quite sensible and priced the issue at the lower end of the price band, leaving some money on the table for investors. Yet, the stock is currently trading about 14% below its issue price. But that is expected as the benchmark indices have slipped by about the same margin.

Retail investors have lost money in several small companies that got listed this year.

The craze among retail investors to participate in the IPO market has been largely missing this year. Despite this, if retail investors have lost money it?s unfortunate. All I can say is that investors need to be cautious and investment bankers need to be more transparent.

What are the alternatives that the government could look at to

narrow the divestment shortfall?

There has been news of government creating crossholdings, where a public sector unit would buy shares of another public sector unit so as to create liquidity in the hands of the government. Perhaps, the government would look at this but I don?t think it?s a great idea. It is a form of window dressing. The other option is to push government-controlled institutions such as LIC to buy into public sector units.

The government can also the current environment as an opportunity to place some high quality shares out in the market at reasonable prices. It?s something the British government did very successfully in the 1980s during their privatisation drive. They placed out shares at a discount to incentivise investors and the entire privatisation programme was very successful.

What are the key challenges

merchant banking industry is facing at present?

The current choppy market is certainly not helping and IPO volumes are weak. On the advisory side, deal flow is still there although volumes are somewhat lower than last year. At the same time there is overcapacity in the system. Post-2008, several investment banks went out and recruited aggressively. Compensations went up, particularly the fixed component. If this situation persists for another six months there is a possibility of a shakeout in the domestic market, which will be good for the industry.