Pricing of IPO’s: Need for question

Author: 
Nantoo Banerjee

Does anyone remember Anil Ambani’s Reliance Power IPO in 2008? The highly hyped public issue was launched in February that year during the stock market boom. The IPO was oversubscribed 73 times recording five-million applications. The issue price was Rs. 450 ($9.15) per share. At the grey market, price was around Rs.900 ($18.30). Reliance Power’s maiden IPO garnered an astronomical $190 billion from subscriptions. It was the world’s biggest IPO of its time. Investors simply went crazy as Reliance Power’s pre-issue ad campaign’s punch line — Power On, India On — created a massive euphoria around the company’s grand future in the energy deficient country.
However, on listing with the BSE and NSE, the share price crashed within minutes of its very opening. Except the promoter’s name, almost everything about the company’s stated projects appeared to be bogus. There were little on ground. No land, no plant. The company underwent a lot of changes over the last nine years. Despite that its share price now hovers around Rs.36 each. Investors lost billions. In an unrelated development only a few weeks ago, Anil Ambani’s another publicly-held mega company, Reliance Communications (RCom), collapsed to the utter dismay of millions of stakeholders, including domestic and foreign creditors, subscribers and customers. However, such stray cases rarely rattle the bullish market sentiment and investors’ gambling instinct. Only honest investors seem to fall an easy prey of stock market boom or bust cycles.
Few serious market researchers will disagree that the current trend of share price boom in India beats all logics and fundamentals. The ballooning share prices of most of the listed companies with BSE and NSE have little to do with their top lines and bottom lines, as also their earnings per share (EPS) and immediate future prospects. The BSE’s record setting Sensex and NSE’s Nifty indices hardly reflect financial performances of the representative picks in their respective areas of industry. Few listed brick-and-mortar companies are making projects investments. India’s information technology (IT) firms and pharma companies are under pressure due to stricter US regulations. Recently, two of India’s large drug firms, Cipla and Lupin, have been dropped from the benchmark BSE Sensex. Many large listed metal makers, telecom companies, infrastructure firms and real estate developers are neck deep in debt. Listed public sector banks are running non-performing assets (NPAs) worth over Rs. 5,00,000 crore and are anxiously waiting for the government’s bail-out package. The government is concerned. It is making serious attempts to push the economic reforms process, which has been recently lauded by such international agencies as the World Bank and International Monetary Fund (IMF).
Lately, even the global sovereign rating agency, Moody’s too appreciated these measures and upped India’s rating from ‘Baa3’ to ‘Baa2’ on November 17, its first upgrade in almost 14 years. However, Moody’s rating has little to do with the corporate equity rating. Yet, bulls in the market took its full advantage to push the Sensex up another 236 points on the day and, to the country’s exporters’ dismay, Indian Rupee appreciated 30 paise to Rs.65.02 for a US$. Surprisingly, Standard & Poor’s, the biggest sovereign rating agency, differed.  It did not see any immediate reason to upgrade its India rating above the ‘Stable’ level. Moody’s higher rating may attract more FDIs and  make India’s global borrowing a shade cheaper and easier, but it does not mean to improve physical and financial performances of listed companies too soon. Take, for instance, Larsen & Toubro, one of India’s top engineering and technology companies. The company’s chief executive S.N. Subrahmanyan strongly feels that India’s business environment will remain subdued and challenging until March 2019, with good growth likely only after the next general elections.
A big FDI inflow may be good for the economy, but not necessarily for the stock market. Most large foreign direct investors in India operate as unlisted private companies. Many listed foreign firms have brought back shares from the market to become unlisted. The stock market is concerned with the performance of only listed companies and not privately held or closely held firms. Incidentally, India’s stock market has long been under the control and influence of foreign portfolio investors (FPOs). And, most of them are big time gamblers across financial, stock and commodity markets in the world. They shine in a depressed debt market as it is in India, at this moment. Investors prefer high-yielding stocks to low-earning fixed deposits in banks or in government and corporate bonds. Medium and small investors go for IPOs and mutual fund (MF) offers.
Mutual Fund operators usually take full advantage of stock boom. Small investors become an easy prey as investments rarely give return before four to five years’ time. MF operators earn their commissions from unit holders no matter if their market transactions make or lose money. In 2017, MF investments in equities have already crossed Rs.1,00,000 crore. Fund operators are continuing to pour money into equity markets. The SEBI records show that till November 10, MFs pumped in a net Rs 102,810 crore in equities — a three-fold increase over the previous year.  FPIs invested Rs 48,190 crore in the equity segment so far in CY17, shows NSDL data. Given the abundant liquidity, S&P BSE Sensex and the Nifty 50 have rallied 23.7% and 24.4%, respectively, thus far in CY17 and breached 33,866 and 10,490 levels in the first week of November.
Fund raising through the equity route, including IPOs, may come come close to Rs.1.5 lakh crore, during this year. This is frightening. Notwithstanding India’s sovereign upgrade, not many of India’s joint stock companies seem to be ready to produce financial results to match the investors’ dream. Sooner or later, the market will collapse, bringing back the memory of 2008. However. bulls never learn. Only small individual investors in stocks and unsecured debentures become the biggest victim of market busts. (IPA)

Wednesday, 29 November, 2017