By all accounts, 2008 may well be the year of the initial public offer (IPO). Not really so much a throwback to the mid-1990s when any fly-by-night operator could come to market, raise money and then vanish without a trace. Today, there are much stricter disclosure norms put out by the Securities & Exchange Board of India (Sebi), which are periodically fine-tuned as well. However, latest estimates reckon that this year, as much as Rs 75,000 crore ? or a staggering $20 billion plus ? may be raised from the primary market. There are a few things to be said about this IPO rush. First, a slew of IPOs coming to market need not mean a cause for alarm. Rather, it could well be good news for investors, since many of these companies would have established reputations, and add to the number of quality stocks listed on the bourses. The market is always hungry for quality paper, a fact amply proved by the overwhelming response generated by two recent IPOs ? the ones by Reliance Power and Future Capital ? which shrugged off a jittery secondary market and saw investors queueing up for a piece of the action. In fact, the whole world has watched in awe as investors have flocked to fill up subscription forms in numbers that can only be described as phenomenal.
The problem, however, may lie in the fact that a few may seek to take advantage of the huge rush for new issues and try to make a quick buck amidst the IPO euphoria. It is here that utmost caution needs to be exercised. Investors will need to read and re-read the fine print of offer documents carefully before they take the plunge. The reason is simple: the present regulatory regime allows free pricing of IPOs, but calls for high transparency in offer documents, through which investors need to be told exactly what are the downsides of a new issue. Risk factors will have to be carefully studied, particularly because of the general euphoria surrounding any company seeking to tap the market. It is true that while there are quality companies coming to market now, there are several rogues that will make lofty claims about their future plans, and seek to capitalise on investor interest by ramping up their premia. Market regulator Sebi, while making every effort to ensure transparency in information offered to investors, will still need to keep a close watch on primary market misdemeanours.
Already, there are signs of the IPO rush leading to a booming grey market even before the stocks are listed. This is outright speculation, and can injure the interests of unsuspecting investors, many of whom fall prey to the lure of extra money all too often. Sebi has already come up with a timely discussion paper on curbing excessive volatility on listing, especially for small- and mid-cap companies. In general, Sebi has trained its guns on the primary market overall, and is alert to possible misbehaviour on that front. It is time investors, too, became careful themselves rather than merely expect the
regulator to do the due diligence on their behalf.
After all, when the going is good, all it takes is one wrong move to spoil the party. And this is where investor awareness and regulatory vigil needs to combine forces to ensure the primary market remains safe and contributes to healthy capital formation.