Going for a ride

Promoter and institutional offloading is a concern for secondary market investors but does not seem so in the primary market

By Mohan Sule

The success of the Rs 6000-crore IPO of ICICI Prudential Life Insurance Company, the biggest primary market offering since Coal India’s Rs 15000-crore share-sale in 2010, proves two things. The slowdown in the loan growth of banks is not due to lack of investment opportunities but because of risk aversion. Second, the atmosphere of gloom of the past four years is dispersing. The optimism is captured by the multiple times subscription and surging small and mid caps this fiscal. A booming primary market tends to suck out liquidity from the secondary market. China had to suspend IPOs to halt the plunge in stocks last year. The Rs 11700-crore issue by Reliance Power early 2008 was blamed for the subsequent crash in prices though the run-up to the collapse of Lehman Brothers later in the year could have been the contributor. Currently, there are no signs of any adverse impact of the resurgence in issuance on the cash market. Volatility has been in tandem with the mixed signs from the US Federal Reserve and the oil exporting countries to cap output. The indecisiveness in movements is also an outcome of the entry and departure of investors with differing views on the course of the global and Indian economies. Such a fluctuation should actually frighten issuers. On the contrary, it is being considered an opportune time to strike as equities are not displaying a noticeable trend either way. Any decline due to profit-booking results in attractive valuations, enticing investors.

The present state of flux is attracting two types of investors. The first considers the primary market to provide better returns in a shorter span compared with the slow trot of quality listed paper. Most issues are recording gains on debut despite charging premium comparable with established competitors in the belief that the acceleration in the growth of the economy is not if but when. The Securities and Exchange of Board of India has taken steps to create a secure environment for subscribers and issuers. The period for listing of securities has been reduced, thereby freeing funds, and transparency enhanced by insistence on elaborate disclosures by companies. The other class of investors prefers the book-building price band over the off-balancing spurt and fall of stocks at recurrent but unspecified intervals. With traditional industries bogged down by excess capacities and leveraged balance sheets, many entrants are from nascent sectors, whose potential at once excites and scares. Valuations become a concern for start-ups from emerging areas such as insurance and e-commerce as there are hardly any peers for comparison. These enterprises are capital-guzzlers. The tepid listing of ICIC Pru seems to confirm the view.

Another discomforting fact is that many offerings are primarily routes for private domestic and foreign investors to exit or for promoters to cash in partially. Secondary market investors scrutinize the increase and decrease in promoters’ control as well as local and overseas funds’ holdings every quarter to validate or churn their portfolio. A change in stake by either categories triggers introspection and investigation.A decline, reflecting doubt about operational performance, corporate governance or industry outlook, is a cause of concern. Not much time is spent brooding why big-ticket investors want to leave through a public issue. It is assumed that their support is no longer required as the entity is ready to stand on its own and they are looking for decent rewards for providing backing when it was most needed. The venture might need to scale up for which resources have to come from the capital markets. Besides, they will be replaced by institutional investors who will be keeping a watch. Yet it is a point worth pondering. First, hedge funds and mutual funds are not for the long haul. Second, if the future of the company is bright, why not stay put? No wonder, many ordinary investors get the feeling that they are being taken for a ride by clever investment bankers. The systematic marginalization of the small investors despite their quota standing increased at 35% over the years means heavy bookings by foreign funds can create an illusion of huge demand. Sebi’s measures such as barring cancellation of interest evinced during book building have eliminated to a large extent frivolous and rigged bidding. Still the question haunts. With the vigor back, it is time for the market regulator to revise the allotment cap for ordinary investors to 50% of the size to ensure that the offerings are priced moderately and the over-subscription genuinely captures the enthusiasm for the issuer.