In the months of March and April so far nearly Rs. 5 Billion have been mobilized from public. This is far lower than Rs. 11 Billion raised in March and April in FY 07 or the average of Rs. 300 Billion the IPOs had netted in FY07. The Indian IPO market which rose to be the seventh largest in the world is today a bit directionless.

What has caused this?

In adequate investor education, greed shown by issuers of IPO, excess supply of equities, undeveloped rating industry & use of rating by the issuers, slide in the secondary marker causing lower returns and negative returns when IPOs are listed are being cited as reasons for this. The statistic reveals that 91 out of the 101 issues that hit the market in FY 2007 were profitable to the investors.

It is worrying when the savings have grown to 36% of the estimated GDP of Rs. 5500 billion, the allocation to the stock and stock market related instruments to slump and leave the new entrepreneurs with little or no risk capital to pursue their business plans. Indian IPOs gave the corporate risk capital of Rs. 200- 240 billion in the past four years till FY 07. The issuers attempted to step this to Rs. 750 Billion, having raised Rs. 514 till Jan 08. The recent mega issues with large premiums (Reliance Power Rs. 120 Billion, Rural Electrification Rs. 17 Billion) the rate of allocation of savings to stock market did not raise resulting in surfeit of paper in the market.

It is correct to attribute every sharp fall in IPO subscription to secondary market trend, tentative as the conclusion may be it is true that every major fail or correction was used by the near term investors to stay away from IPO and exit their holding. Overpricing an IPO is very much an issue, the greed of the issuers is stunting the IPO market growth. Similarly the under pricing has led an environment where the IPO is a sure passport to make instant monies. Few of the average investor to the IPO in their greed to gain manipulate the system with multiple applications flooding the subscriptions These investors, who have a near term vision exit as soon as their profit objective is realized and no sooner they are able to spot another profitable IPO. These investors with hot monies behave similar to hedge funds and through their trading enlarge the over subscription or under subscription of the IPOs. Few of them are active traders in the pre issue grey market. In their profit making pursuit these investors mislead the ordinary investors to quick profit and lower their time horizon of investments. The result is general rejection of good and sensibly priced issues in the market.

Another major reason is the crowding of merchant bankers who do not have adequate vision, capital and risk bearing attitude who are advising the issues in the first place to go for high pricing and start lowering them at the start of the trouble. They are not made to hold a part of the issue. These merchant bankers have acted as market makers with short horizon, with near term funds and exit issues as soon as they spot another opportunity. In essence the larger or smaller players have the same attitude of making a profit as though tomorrow never exists and not believing the reams of paper they have produced on the issuer’s prospects and the underlying fundamentals of sector and the economy.

Is there a way out?

The Indian stock market is known for the high volatility. Theoretically it is possible to get a return of more than 50% in most traded stocks even when you turn them over one time as the 12 month high and low prices give a huge opportunity for the market operators to exploit. These conditions are caused by high proportion of speculators in the market driving the prices and increasing the volatile prices in the general near term direction of the market. A stable secondary market even if it is not buoyant will augur well for the growth of primary market. The present government has not addressed major reform issue especially the petroleum product pricing although it has been successful in broadening the tax net and compliance. The budget tax cuts and farm waiver have come at a time when food prices world over were soaring. This has accentuated the inflationary pressure. When the central bank raises the interest rate to curb inflation, the move will formally put a brake on the secondary market growth although the Indian economy will continue to sustain and grow further.

Improved investor education to look stock market as an essential risk bearing medium and long term investment, rating of issues, urgent need to put the market maker scheme in operation true to the script, a cap or scheduling of large primary issue lest they crowd out the smaller and otherwise useful offering to public are the need of the day.

With strong fundamental and an extremely attractive destination of foreign funds, the Indian economy’s growth story will continue and so also the hunger for new stocks by the investors in the IPO market.