Troubles don?t come alone, they say. The Reliance Power initial public offer (IPO), billed as the solace of a sighing market, has only added to the stockmarket gloom with its lacklustre listing. And, while the BSE Sensex also took a big tumble on Monday, the reverberations of this episode might be heard for some time to come?less because some Rs 2,000 crore of investor wealth has vanished overnight, and more because the difference between speculative and investment interest in a company has never seemed so sharp. Much blame will be apportioned to the hype created by the parallel grey market for IPOs running in shady bylanes. But before the blame game starts, it would be pertinent to note that all Reliance group stocks, along with many others, saw a phenomenon of insatiable buying that started around November 2007 and peaked around January 11?four days before the Reliance Power issue opened, incidentally. Many of these companies were attracting valuations that could scarcely be justified by business fundamentals. Without earnings visibility to point towards, stock analysts were merrily citing ?sum of the parts? or ?embedded value? justifications, by which subsidiaries were valued on their replacement cost rather than cash flow generation. This was a new version of the replacement cost valuation formula propounded by the market?s big bull of the early 1990s, Harshad Mehta. Anyhow, what it did was boost the grey IPO market?which trades scrips even before they are listed. Leveraged bets were being taken, and there was much greed to go around. Some of these bets were allegedly based on ?confirmed allotments?, with promoters whispered to be hand in glove with grey market operators. The very presence of a parallel market tends to encourage expectations of huge gains once a stock lists.
With the sudden change in market sentiment, the grey market has all but collapsed. And it is now clear that even if an issue is oversubscribed by some insane multiple, the market debut price need not be much higher than the issue price. In fact, it can be lower, as Reliance Power?s first-day close has shown. Investors who are genuinely enthused by this company?s power projects, naturally, get an easy ticket in. But as a market lesson, Sebi must take action to extirpate the grey market before it ruins investor confidence in public issues.
