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Stockmarkets: The right signals

Apr 12, 2005

While the secondary markets may not have exactly been in the pink of health in recent times, the primary market continues to hog the limelight. And why not? With most of the IPO issues turning out to be huge profit churners for investors, the interest witnessed in IPOs has been huge and has shown no signs of waning off as yet. While the past has been good for primary markets, it must be noted that as per reports, 2005 would be another record-breaking year for the primary markets with well over the Rs 305 bn raised in 2004. In this backdrop let us consider a recent move by the Indian stock markets regulator, Securities and Exchange Board of India (SEBI), which has altered certain norms pertaining to the primary markets, which seemingly augur well for the markets over the long haul.

No. of times oversubscribed...
 QIBsNon-institutionalRetailIssue PriceCurrent price% gains/loss
Indoco Remedies37.8 93.6 69.6 245 294 20.0%
SAL Steel 2.9 39.3 33.7 14 21 48.6%
NTPC18.0 10.9 2.8 62 85 37.1%
Indiabulls11.5 22.1 23.1 19 111 481.6%
TCS 6.0 18.2 1.9 850 1,364 60.4%
NDTV11.7 122.7 44.6 70 179 156.4%
Datamatics18.9 50.8 14.5 110 101 -7.8%
Dishman Pharma27.9 81.3 12.5 175 630 260.0%

The above table clearly proves the point that many IPOs have seen the investors laugh all the way to their banks. And the performance has been delivered by not just mid-cap stocks like Indiabulls (482%), Dishman Pharma (260%) and NDTV (156%) but also by stocks of industry leaders like TCS (60%) and NTPC (37%). However, in the above table, apart from the % gains/losses, another interesting aspect to be considered is that of the oversubscription factor. And in this too, consider the interest generated in the retail category with massive over subscriptions.

While one part of the explanation to this is the fact that issuers these days have adopted the strategy of 'leaving something on the table for investors', which has helped them attract larger bids and greater interest in the stock, the other part is the fact that 'most' of the issues have been largely quality issues, thus supporting investor confidence and consequently their participation in the IPO.

The recent announcement by SEBI intends to partially take care of the 'retail oversubscription' issue. As per the new norms, SEBI has raised the limit reserved for retail investors in an IPO issue from the current 25% to 35%. The regulator has also doubled the investment limit for retail investors to Rs 1 lakh from the current Rs 50,000. These moves are seemingly aimed at encouraging higher retail participation as one, they would now have a larger share of the cake (IPO) on offer and second, they would be able to bid for a larger number of shares considering that some good quality shares like TCS and Jet Airways, demanded a larger investment limit considering the pricing of the issues.

Another benefit from the new norms could be that now a lesser number of retail investors would be vying for a share of the issue post-listing, which is generally at a premium to the issue price, thus preventing them from investing at higher levels post-listing. It must be noted that the Indian populace is by and large rather apprehensive of investing in stockmarkets. However, they cannot be blamed for this as the two major stock market scams (Harshad Mehta and Ketan Parikh) have rocked their confidence. However, with a slew of changes incorporated by SEBI as far as company disclosures are concerned, stricter laws and stringent control measures governing trading on the bourses, etc. have all made investing in equities are a much safer option than say a decade ago.

Apart from these 'very recent' moves pertaining to IPOs, some other 'recent' moves by the government also augur well for the long-term development of Indian stockmarkets. It must be noted that the government has allowed consolidated investments of up to Rs 1 lakh, which can be claimed as tax exempt by investors. The allowable avenues for this investment includes the equity linked savings schemes (ELSS) offered by mutual funds and the changes made in long-term and short-term computation of capital gains tax. Both these measures are aimed at encouraging increased retail participation, which has traditionally been low compared to most other countries in the world. Further, greater participation by retail investors (over the longer-term), would help in mitigating the adverse impact of Foreign Institutional Investors (FIIs) inflows volatility to that extent.

Now, while SEBI's measures are primarily aimed at increasing retail participation, as an investor, one must not forget to take all the necessary precautions while investing in equities, be it through primary and/or secondary markets. These include confirming (and re-confirming) the fundamentals of a company by going through the red herring prospectus (IPOs) and the annual reports (listed companies), judging the credibility of the management, as it is ultimately they who would be steering the fortunes of the company you would be investing in and last but not the least, the valuations of the stock. Remember, every stock is worth a particular price.

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