News / Small is beautiful for IPO investors
Feb 22, 2010

MUMBAI: This could well be adding insult to the government's injury in the NTPC follow-on public offer (FPO). Even as investors — foreign funds, local mutual funds and retail investors — were indifferent to the state-owned utility's mega issue, they have been flocking to initial public offers (IPOs) from hardly-known companies. A couple of small-sized companies like Infinite Computers and ARSS Infrastructure attracted more bids (in value terms) in each of the investor categories compared with those received by the state-owned blue chip.

The fact that small-sized issues have yielded better returns than their large-cap counterparts over the past six months, and that smaller offerings could have been more aggressively marketed to prospective investors, explains this trend, say investment banking circles.

NTPC's FPO of over Rs 8,000 crore was subscribed 0.7 times and was finally subscribed just 1.2 times, with most bids coming from state-owned banks and insurance companies. State-owned Rural Electrification Corporation's (REC) FPO received an even more frosty response from investors on the first day, with less than 0.5% of the book being subscribed. The maximum number of bids came from high net worth individuals (HNIs), who are eyeing arbitrage opportunities between the floor price of Rs 203 and the futures price.

The stark contrast in investor response to NTPC, on the one hand, and Infinite Computers and ARSS Infrastructure, on the other, has baffled market watchers. NTPC is the largest power producer in the country, with a consistent track record. The company clocked a turnover of Rs 44,245 crore for FY09, and a net profit of Rs 8,245 crore. Infinite Computers clocked a turnover of Rs 496 crore for FY09 and a net profit of Rs 45 crore. ARSS Infrastructure has a turnover of Rs 628 crore and profit after tax of Rs 51 crore for the same period. Market watchers say that subscription numbers often reveal strange patterns.
"Some issues are oversubscribed by a handful of foreign institutional investors, and others by a few high net worth individuals," says a senior merchant banker with a domestic firm. "There have been cases where HNI and retail categories are oversubscribed many times despite tepid response from foreign funds," he says.

While it's known that brokers play a key role in filling up the subscriptions of small, and mid-sized companies, people familiar with the issues also say that many bankers or issuers themselves see to it that the issues are not subscribed by retail investors beyond what is required by them. "In order to bring in more retail participation, the government should offer substantial discount to the issue. In case of French auction, it should suspend the cash and derivatives segment trading during the issue period," says said Jagannadham Thunuguntla, equity head, SMC Capitals.

"The other most important aspect is the size of the issue and the liquidity in the stock. For instance, average daily volume in NTPC is about Rs 95 crore on an average and it raised about Rs 8,600 crore through the issue, over 90 times the daily volume. What happens even if 20% of this fresh issuance comes to the market for sale? It is unlikely that this will be absorbed and the stock price will fall. Similar fear is shared by foreign and domestic institutions which think that they will only be able to exit the counter at a very high impact cost," adds Mr Thunuguntla.

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