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.