The IPO Deep Freeze

12 February 2008

Reliance Power's poor listing was the last straw. The domestic IPO market has slipped into a deep freeze and is unlikely to see a revival soon. But, investors have only themselves to blame! By Vivek Sharma

The new issues frenzy, built on the excellent returns made by IPO investors last year, peaked last month when the Reliance Power issue opened. At nearly $3 billion, it was the biggest ever IPO by an Indian company and the biggest global IPO so far in 2008. The massive marketing effort to promote the issue was unprecedented and resulted in lakhs of new retail investors opening demat accounts, in the hope of making quick profits. Institutional investors, both domestic and foreign, also briefly suspended their self-proclaimed ability for sane judgment and jumped in.

The issue was fully sold within a minute of opening and by the time it closed, had generated demand of nearly Rs7.5 lakh crore and was subscribed a massive 73 times. Grey market trading in the stock had taken off in right earnest even before the issue opened. Premiums of over Rs450 per share in the grey market definitely boosted investor demand for the IPO. Business television channels fuelled the frenzy by providing regular updates of grey market price changes.

When the IPO opened, market pundits were confident that investors would double their money. All they had to do was place a bid and pray for an allotment. If only, making money was all so easy!

Markets started tanking the day the Reliance Power IPO opened and the indices have now retraced most of the up-move made late last year. Even though the grey market premium continued to lighten, most analysts were expecting some gains for the stock on listing. But, that was not to be as Reliance Power became the first stock from either Reliance groups to close lower on debut.

The large IPOs - Wockardt Hospitals and Emaar MGF - that followed Reliance Power suffered from the weakened market sentiment. Both issuers cut their offer price bands and extended the offer period, but to no avail. Investor interest had vanished and the issues were withdrawn. Other issuers who were set to hit the market are unlikely to go ahead. What a change in fortunes this has been for the IPO market, in barely over a month!

Big gains of 2007 can no longer sustain investor interest
Most IPOs that hit the market last year did generate good returns for investors. Though the sharp market rally towards the end of the year helped, last year's IPOs were generally of better quality with established businesses and were more reasonably priced.