News / Markets waking up to new IPO order
Mar 08, 2010

Show me the money. This could best explain the growing trend among the Dalal Street stags, the non-institutional investors and speculators who aim for returns from public offers. Lately these investors have been going after the not-so-high-profile issues, and shunning the well-marketed ones, because they feel it's the smaller ones which offer a higher chance of minting money.
The net result: A lot of large-size issues from established companies closed with muted response. For example, the follow-on offering for NTPC, one of largest and the best run power companies in Asia, was subscribed just about 1.2 times.
Although several of the recent offerings were sold based on the company's strong long-term prospects, the fact remains that increasingly, non-institutional investors are becoming impatient and are not really willing to see their money, invested in the IPOs, show up in the red in their portfolios. Another reason, market players said, is that in most of the high profile issues, while deciding on the pricing, promoters and merchant bankers hardly leave anything on the table for short-term gains.

"The pricing disconnect in the IPO market has stayed for far too long," said Arun Kejriwal, director, KRIS, an investment advisory firm and independent market analyst. "That's what is prompting a lot of investors to move to smaller issues where chances of such disconnect are less and hence, the probability of making money is higher," said Kejriwal.

For example, the prices of some of the IPOs had to be revised downward to attract additional investors after a few days of the offer opening since the initial price did not generate enough demand. In some of the offers, some bids were also withdrawn. These often happened as soon after the offer opened, the stock market fell sharply to jeopardise the IPO plans.

Such price-band revision also severely dents the usual pricing justification by merchant bankers that "the issue is fundamentally strong". "If an issue is fundamentally strong, how could the fundamentals of a company deteriorate so drastically within a matter of a few days?" asked a local fund manager.

A look at the completed public offers since 2008 shows that of the 54 in the list, in as many as 34 offerings, investors are still out of money (Table 1). And of the 20 in which they are in the money, in eight, the returns are less than 10%. Going by the prevailing interest rate and financing charges for public offerings, brokers feel a return of up to 10-15 % is not enough to leave the investors any return at the net level.

Along with the low or negative returns from most IPOs, which is prompting investors to become increasingly skeptical about public offers as an investment avenue, a strong supply pipeline for such offers is also prompting investors to question if the market has the ability to absorb so much of shares at the right price.

During the current financial year, 111 draft prospectuses for public offers were filed with Sebi, including for rights offers, for the regulator's observations (Table 2). Of these, 51 were filed in the last five months. These include the much talked about offerings like NTPC, REC, NMDC, Godrej Properties, Jaypee Infratech, United Bank and Oberoi Realty.

Compared to the current financial year, in FY09, the year that witnessed the severe slowdown in the economy and the BSE sensex fell to multi-year lows, 70 prospectuses were filed. But in FY08, during the hay days of the last bull run, 168 companies had filed with Sebi for tapping public money.

Merchant bankers said a large number of companies, of varied sizes, are also in the preparatory stages for going public. These companies could file draft prospectus this fiscal year or the next.

While the returns and over supply are affecting public offers, a new system of public offering, French auction, is being tried out by merchant bankers. In this method, the bidder who bids the highest, gets the number of shares bid for.

Unlike this method, in the time tested book building method, a price is fixed after the close of the offering and all the bidders who came in at price fixed or above, gets shares on a proportionate basis.

The NTPC offer, through which the government mobilised nearly Rs 8,500 crore, was the first to take the French auction route. But it did not attract too many bids. In fact, most are blaming merchant bankers for the muted response, saying one should have never experimented with a new method for such a large and prestigious offering.

Of course these are early days to write off the French auction method for public offers in India, but an analysis of the three offers, NTPC, ARSS Infrastructure and Infinite Computers, that had opened almost at the same time but used different routes to mobilise funds, has thrown up interesting facts.

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