Turbulent markets

Businessworld
Rajesh Gajra

Over the past two weeks, a surfeit of tea and coffee has been consumed, all thanks to the turbulence in the initial public offering (IPO) market, otherwise known as the primary market. Investment bankers and promoters of companies have been spending their days holding long meetings in the midst of their IPO offer periods to decide whether to abort planned IPOs, due to the sudden withdrawal by investors of all stripes: retail, high net worth individuals and even institutional investors.

Blame the meltdown in global equity markets in January - in the middle of a colder than normal month. But how much of a link is there between the secondary markets that saw huge losses, and the primary markets, where capiutal is being raised for ostensibly good projects? “Sentiment is a common thread between primary and secondary markets,” says Pankaj Vaish, MD and head of equities and fixed income liquid markets at Lehman Brothers in Mumbai. “Aggressively priced IPOs and those with massive oversubscriptions, without full financing, can signal that perhaps the market is getting too hot, as they did most recently.”

While the weather has gotten warmer, the once red-hot IPO market has been reduced to cold ashes. In what under normal conditions would have been a breeze, three high-profile IPOs — Wockhardt Hospitals, Emaar MGF Land and SVEC Constructions — had to withdraw their IPOs due to complete lack of investor interest.


Where Have All The Investors Gone?

“Realisation is dawning on many investors that IPO valuations may be on the high side,” says Stuart Smythe, executive director and head of equities, Macquarie Securities India. “They are becoming rational now and their risk appetite has been moved by recent global market weakness.”

For retail investors, the Reliance Power IPO was a rude wake-up call about the vagaries of the market. The stock was expected to list at close to Rs 1,000, going by the trade in the grey market. While it did open higher than the offer price of Rs 450 on 11 February, by the end of the trading day it closed down much lower. Secondary market behaviour since then has been erratic; the Bombay Stock Exchange Sensitive Index (Sensex) has been behaving like a yo-yo.

One segment that has been severely affected are the leveraged HNIs (high net worth investors) who took severe losses on IPO bets gone wrong, particularly Reliance Power IPO. Even as BW goes to print, there are settlement problems in the grey market, with investors unable or unwilling to pony up on the wrong bets they placed. For HNIs, the IPO market is going to be off-limits, at least for a while.

The Ripple Effect

The withdrawal of three high profile IPOs has severe implications for the equity market. “The IPO market is important from the economic perspective; it gives opportunity for companies to raise resources and acts a channel for investors to invest in such companies,” says Devendra Nevgi, CIO of Quantum Asset Management, managers of Quantum Mutual Fund. “When companies withdraw their IPOs you have to ask whether they really required the money in the first place.”

The second question that looms large is one of valuation. The fact that majority of IPOs in the last year have listed at a 10-100 per cent premium over the offer price raising questions about whether the fundamentals of the business and the markets justified the price. "If an IPO is priced at a premium to regional and local peers, global money managers struggle to justify assessing a new offering at a premium, when their existing holdings are at discount, or comparables are trading at fairer values than a new offering," says Macquarie's Smythe. For instance, the price to earnings ratio of Emaar, a realty company, was much higher than the listed realty stocks like Unitech and DLF that had fallen steeply in the secondary market slide.

Will Sanity Return

The secondary market prices of newly listed IPOs have also seen a correction in their prices. The most dramatic case was the Rs 10,123 crore IPO issue of Reliance Power. Issued at Rs 450, with a discount of Rs 20 for just the retail investors, it got listed on 11 February. It was the first big IPO in recent history that traded at a discount to the issue price on the day of listing. Its average traded price on the National Stock Exchange was Rs 416.80.

Though not completely unexpected, the dramatic withdrawals of IPOs have bought the investment bankers to some senses. So will things change?

In fact Reliance Power, trying to brave the turbulence in the markets, has announced that each investor with shares of the company will be compensated for his/her capital loss by being issued free bonus shares. The decision will be taken on Feb 24 at a board meeting.


As the news became public Reliance Power stocks soared nearly 12 per cent on the National Stock Exchange and touched a high of Rs 430, price at which shares were allotted to retail investors. The stock rose 11.67% in the BSE and even pulled up the rest of the market to the 18,000 level.

The board would also consider other measures that could reduce the cost of Reliance Power Ltd shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors, the company had said.

Smart move to reduce the turbulence in the market. Also a way of maintaining its reputations since the ADAG (Anil Dhirubhai Ambani Group), which owns Reliance Power, has other IPOs to float: Reliance Infratel and Reliance Entertainment.