There is a concern that the resurrection of the initial public offer market will be stunted. The concern is based on the last two issues that hit the market place ? Adani Power and NHPC. Adani Power’s Rs 3,000-crore IPO, which was officially over-subscribed 18.11 times, with an issue price of Rs 100, closed on the listing day at Rs 100.05 and is now trading around the same price. So is the case with the Rs 6,000-crore NHPC mega issue which, having been over-subscribed 23 times, gained just about Rs 0.7 on an issue price of Rs 36.
The fact that startles analysts is that the market capitalisation for all the issues listed in 2009, from the listing price and the current price, has fallen by Rs 2,399 crore. And this is in line with the Rs 43,000 crore of market capitalisation erosion in IPO issues that took place in the calendar year 2008, when only five issues had scored listing gains. The concerns are definitely valid.
The concern is that the pricing proposed by merchant bankers is on the higher side, and therefore the investors looking for listing gains stand to lose out and could stay out of the market. This in turn could impact the market that has shown signs of revival and there could be more takers for fixed-income issuances like the non-convertible debenture issues made by reputed companies such as Shriram Transport Finance and L&T Finance recently. With the mega issue of around Rs 6,000 crore from HDFC expected to hit the markets soon, the placement of IPOs could run into rough weather.
?There are several technical issues to this. One of them is the issue of the price discovery time and the mechanism thereof. Also, there is the grey market to contend with. All this has diffused the focus from pure investing,? says Sujth Vadlamani, a merchant banker with a leading firm in India.
The current IPO process involves around 15 days from the time of issue closure to the actual listing and this can be an impediment for efficient price discovery. There could be many swings in the marketplace that would have an impact on the listing gains. Already the Securities & Exchange Board of India (Sebi) and its Primary Market Advisory Committee (PMAC) is working on this and would soon be issuing guidelines to this effect. Shortening of the share allotment and the listing period will have an impact on the illegal grey market that springs up each time the market looks to be strong and the IPO market revives. It has started happening again.
The market is predominant in Gujarat and in Mumbai. However, cities such as Ahmedabad, Kolkata and Rajkot are said to be the most active in the grey market.
Here, trades done in the grey market are settled on the day of listing. A price is negotiated over the offer price, and is usually a premium considering the fact that the earlier trends in listing gains averaged 50%. And once the deal is done, the seller has an obligation to deliver the shares after he has been allotted the shares by the company. The gamble gets wider in case the seller does not get an allotment from the company, and then he has to buy from the open market and make good the commitment. There is also a secondary market for allotments. Shareholders who have received their allotments also trade in the grey market. Usually, strong issues attract premiums of around 20% over offer price in this market. And then there are those who actually borrow money to play this market and those who lend at high rates — all illegally done.
The market, however, still remains shaky, thanks to the Reliance Power jolt that these speculators got and the current shake-up in the NHPC issue. During the Reliance Power IPO, reportedly there were transactions worth Rs 2,500 crore in the grey market. And with the secondary market weakening and the Reliance Power IPO not being as successful as was expected, there was a huge payment crisis and the market literally shut shop. Even now, with the NHPC issue, the premium for a Rs 36 offer price was around Rs 13 in the grey market and as the issue approached listing time the premium halved causing several high net worth individuals to lose out overnight.
Now, one of the reasons for the premiums to crash despite the issue being oversubscribed is being attributed to the huge interest by qualified institutional buyers (QIBs). These set of investors do not have to pay the entire application money upfront and only shell out around 10%, unlike other individual investors. This done, the rest has to be paid two to three days after allotment is done. So institutions with surplus cash have been looking at this as a great opportunity for short-term gains as at worst, there could be a gain of around 4% to 5% in a day and this is a good amount for a 15 day wait.
QIB participation in the IPO market has been staggering, they usually get a quota of around 60% of the issue and have been lining up to corner shares. And have been seen offloading shares on listing day causing the market to have a limited upside. Sebi and the PMAC is also working on straightening this out and the percentage of upfront payments could be increased.
Merchant bankers reckon that the real issue is that of the investing attitude. The entire attitude has been to look at listing returns. ?Most of the players, including retail investors look at this as a speculative game and hence are miffed when listing gains don?t happen,? says an investment banker. Ravi Kapoor, managing director, head of south Asia capital market origination at Citi says, ?I think people have to be patient and take a long-term view on the equity markets. Several investors want to move away after making profit fast and take a very short-term view, but this can be dangerous.? This is where the role of sustained investor education becomes important. With the price discovery mechanism getting more realistic and the participants coming in at an equal footing, these issues will be ironed out, albeit it would take some time as infrastructure builds up.