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Stockmarkets: Stay put...

Mar 15, 2004

The government's divestment program through its secondary offerings in 6 public companies (IPCL, CMC, IBP, Dredging Corporation (DCI), GAIL and Oil and Natural Gas Corporation Limited (ONGC)) received a tremendous response. This is evident from the fact that these offers were oversubscribed several times in most of the issues (notwithstanding the recent fault detected in the stock exchanges software program that led to the over counting of subscriptions). Through this program, the government has managed to raise close to Rs 150 bn from the markets, which would help it not only meet its divestment target for FY04 but also assist it in keeping its fiscal deficit under check.

Allotment
price
For Retail
Investors
Price on
March 12, 2004
% gains over
allotment price
Dredging Corp. 400 380 557 47%
CMC 485 461 580 26%
GAIL 195 185 226 22%
IPCL 170 162 193 20%
ONGC* 750 713 801 12%
IBP 620 589 635 8%
*Assumption

The benefits of this were not restricted to the government alone, as any government is prudent enough (especially before election times) to keep its populace happy and thus ensure its vote bank. The benefit to the retail investor in the government's divestment program is the fact that investors are allotted the shares at 5% below the offer price finally arrived at through the book-building process. This 5% advantage to the retail investor is in addition to the huge price differential prevailing between the retail offer price and the price of the stock listed on the stock markets (see table above).

Moreover, the government made sure that its efforts at sustaining the existing feel-good factor was not affected by the act of any miscreant who intended to play mischief with the markets. This was evident from the government's intervention in the stock markets wherein the divestment minister publicly warned those who intended to form a bear cartel and affect prices of the stocks being offered. This action by the government was a reaction to the continuous drubbing of these public sector stocks on the bourses since the start of 2004 that had led to these stocks losing an average 26% from their highs of 2004 (for example, see IPCL chart below). During the same period, the Sensex lost 10%. However, the governments 'warning' not only took the financial markets by surprise but also led to a sharp bounce back in the shares of the above public offerings. All for the retail investor!

However, now that all the issues are closed, the process of allotment of shares is already underway. However, considering the attractive price differential prevailing between the allotment price and that prevailing in the stock markets, it is very difficult to convince an investor to hold on to their stock rather than being content with the average 20%-25% gains he would fetch by selling his shares on the day of allotment. Thus, the effect of this sudden increase in supply of shares in these stocks post-allotment can be seen in the form of a substantial correction in the stock prices of these stocks during the previous week with the biggest loser being IPCL (down 14%) on twice the volume on the bourses as compared to the first week of the current month (see chart above).

Going forward, a similar kind of investor behaviour cannot be ruled out in the case of other stocks also. However, it must be noted here that this kind of an activity is not restricted to only the secondary offerings but is also valid for new companies that get listed on the bourses e.g. Indraprastha Gas, TV Today, etc. This act of selling a stock, which is in demand, to earn profits in the first few days of its allotment/listing, is termed as 'flipping' in stock market parlance.

However, we must point out here that for long-term investors, this should not be a cause for concern if the investor has invested in an IPO on the basis of the fundamentals of the stock. Thus, if the company has a sound business model and transparent management, capable of delivering and increasing shareholder value, then instead of getting satisfied with 20%-25% returns.... stay put!


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