Shady IPO deals continue unabated

Activities in the Indian IPO space have a fair share of greedy promoters and underhand dealings. Issues continue to be priced irrationally, partly because of a misplaced perception of future performance and investor interest, and partly to feed the egos of power-hungry promoters. Adding to this, the nexus between company promoters and merchant bankers to the issue makes the picture even murkier. In such a scenario, who would blame the retail investor for not taking interest in the primary markets?

Retail investor response to recent IPOs has been tepid at best. These issues have been subscribed fully only through ‘discount deals’ with large institutional investors and merchant bankers, who demand a hefty discount of 30%-50% in order to help close the issue and soothe frayed nerves of panic-stricken promoters. This is one of the primary reasons explaining the mystery of IPOs listing at substantial discounts to the issue price. This may be just the tip of the iceberg, though, as other worrying trends are surfacing within the IPO arena. There are instances of promoters doling out cash to arm-twisting merchant bankers seeking upfront rewards for closing out under-subscribed issues. Other reports indicate merchant bankers applying in huge volumes to IPOs where investor response is muted, keeping promoters at their mercy till the last date of the book closure.

Of the 16 IPOs that have come up so far in 2009, only six are trading above the issue price. Others have plunged steeply against the issue price. Den Networks, which listed on 24 November, closed at a discount of 16.36% to the issue price of Rs195. It is currently trading at nearly 20% below offer price. Although the offer was oversubscribed 1.04 times, retail portion was subscribed only 0.0963 times. Investor interest was also muted in the offers by Oil India, Raj Oil Mills and Globus Spirits. Others are struggling to provide positive returns despite being oversubscribed. Euro Multivision and Rishabhdev Technocable are currently trading roughly 61% and 47% respectively below their issue prices. Indiabulls Power, which attracted huge attention even from retail investors, is down 27% over its issue price. Globus Spirits, Adani Power and NHPC also suffer from the same fate.

This IPO debacle has not gone unnoticed at various equity research firms, where some analysts are, for once, sounding off investors against putting money in IPOs of companies lacking enough credibility. Even companies with strong fundamentals are being scrutinised in greater depth. IPO price bands of Adani Power, Oil India and Raj Oil Mills were considered steep by some brokerage firms despite healthy prospects. Pipavav Shipyard IPO was actually assigned an ‘avoid’ rating in one of the research reports.

Amidst all this, the government is drawing up blueprints for follow-on issues for PSUs. However, before the government decides to immerse its feet in choppy waters, it should have a closer look at the goings-on to avoid being taken for a ride by the investment banking community. 
 

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COMMENTS

vijaipratap

8 years ago

sir,

interesting article but the author has failed to highlight one of the basic problems:
'aggressive' pricing.
most ipos have settled down at their true value, post listing.
thx.

Watch Out! They Are Out to Get You

Sucheta Dalal explains the role of companies, investment bankers and regulators in fetching poor IPO returns which has made the market comatose

We are back a full circle. A dozen-odd years after the IPO (initial public offering) mania of 1992-96, the market is dead again. Ironically, the Confederation of Indian Industry (CII) is the first to kick off a discussion on how to revive the...

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Stocks climb to five-week high

Sensex gains 68 points to close at 17,199 in volatile trade

The stock market climbed to a five-week high in volatile trade on Wednesday, with the BSE Sensex gaining 68 points to close at 17,199 while the Nifty closed 18 points up at 5,108. Market volatility is expected to continue over the next two days as traders roll over positions in the derivatives segment ahead of expiry of the November 2009 contracts on Thursday. At the end of Tuesday’s trading, rollover in Nifty futures was about 54% while rollover in Mini Nifty futures was about 33%. The market-wide rollover was about 48%.
 
Reliance Industries (RIL) rose 1% on reports that the company has reopened 900 gas stations, which were shut down when state-run oil marketing firms were selling heavily subsidised fuel.

India’s largest small-car marker Maruti Suzuki India rose 1% on reports that the company will spend Rs2,000 crore to expand production capacity at its Manesar factory in Haryana.

However, India’s largest commercial vehicle maker Tata Motors fell 1% on reports that the company is looking at buying private equity firm Actis’s stake in truck and bus-maker Swaraj Mazda.
 
Mahindra Satyam slumped 11% on reports that the Central Bureau of Investigation found evidence of an additional Rs4,739 crore corporate fraud in the company, committed by its founder R Ramalinga Raju and his associates.

Bajaj Hindusthan was up 5% on reports that a foreign fund hiked its stake in the firm.
 
Unitech fell 2% on equity-dilution worries following reports that the company has sought approval from the department of industrial policy and planning and the Reserve Bank of India to raise $700 million through foreign currency convertible bonds.

J Kumar Infraprojects’ order book is worth Rs1,475 crore after receiving pilling works orders from Larsen & Toubro and others worth Rs8.75 crore. The stock remained flat.

Welspun Gujarat Stahl Rohren was up 3% on reports that the company has successfully mobilised $250 million.

During the day, Asia’s key benchmark indices in Hong Kong, China, Japan, Singapore, South Korea and Taiwan rose by between 0.34%-2.07% on expectations of stronger economic growth.

As per data released by the Japanese finance ministry, Japan’s exports fell 23.2% in October, compared with a 30.6% decline in September.

On Tuesday, in the US markets, the Dow Jones Industrial Average was down 17 points while the S&P 500 and the Nasdaq Composite slipped one point and seven points, respectively.

As per reports, US Federal Reserve officials are confident that the US economic recovery will be durable, but they do not see employment or inflation picking up soon. The US Fed projected the economy will shrink 0.1% to 0.4% this year and grow by 2.5% to 3.3% in 2010. US GDP growth in the September 2009 quarter was revised to 2.8%, lower than the initial reading of 3.5%. The conference board’s gauge of consumer confidence rose to 49.5 in November 2009 from 48.7 in October 2009 and home prices improved for a fifth straight month in September 2009.

According to the Office for National Statistics in London, the UK’s gross domestic product fell 0.3% less than previously estimated in the third quarter as consumer spending stopped falling and the service industries’ slump eased.
— Swapnil Suvarna [email protected]

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