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IPO: The onus is on us

Feb 26, 2004

As we all know, the stock markets are dependent on government policy to a large extent. After all, the direction any economy takes is dependent on the policies that the government frames over the long-term. In this light, the government's policy on disinvestment has created a sort of stir off late. We are referring to the significant fall in the domestic indices in the last 1 to 2 weeks, and especially the fall witnessed in the prices of those companies in which the government is disinvesting part of its stake. If one were to notice, in the last 2 weeks, stock prices of companies like IPCL (Indian Petrochemicals), CMC, IBP, GAIL (Gas Authority of India) and ONGC (Oil and Natural Gas Corporation) have seen significant volatility and in most cases, a fall as well. For the retail investor (who historically has been ill informed about the workings of the stock markets), this downward correction and volatility may not have meant much. But the disinvestment minister Mr Arun Shourie, indicated yesterday that all may not have been fair as far as the movement of these stocks are concerned.

(Rs) 16-Feb 25-Feb % change
IPCL 184 186 0.9%
GAIL 225 196 -12.8%
IBP 714 667 -6.5%
CMC 541 540 0.0%
ONGC 728 670 -7.9%
Dredging Corporation 502 461 -8.2%

The minister's indications has been that there may have been a foul play on the part of certain entities that operate in the market, due to certain vested interests. And to that extent, the implication has been that the prices of these stocks may have been manipulated. This is one of the few instances that the government has commented adversely on the stock markets. However it is not surprising considering what is at stake. The whole disinvestment target (Rs 145 bn), hinges on the sale of government stake in ONGC and GAIL. Hence, the government may not be tolerant of any erosion in value (stock prices) of these entities during the process of stake sale.

What does it mean for retail investors? From our perspective, while it may be impossible to ascertain any case of foul play in the movement of these select stocks over the last two weeks, the volatility has been significant. Though the objective, to meet disinvestment targets and involve larger retail participation seems justified, the hurried nature of the government has created a tentative environment in the stock market. For instance, the floor prices of most of the issues have been announced a day or two before the issue actually opened, leading to uncertainty.

What investors need to understand and learn from this occurrence is that, while market movements in these stocks may have been due to different reasons, the fundamental principle remains the same. That is, over the long-term, the stock price reflects the inherent value of a company.

Should one jump into the ‘Offer for sale' bandwagon? We are not sure considering the over subscription rate in the market. Retail investors may land up locking in large sums without any clarity on the allotment. At the end of the day, these companies are already traded in the stock market and facts are in front of everybody. An ‘offer for sale' does not change the fundamentals and therefore, one need not jump into the bandwagon. If one is trying to ‘cash-in' (i.e. buy now and sell on listing), then the concerned investor should take the onus on himself, in the advent of any loss.

Please click on the link below to read our detailed analysis of IPOs and ‘Offer for Sale'.


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