Dec 23, 1999|
Euphoria in the IPO market
In what could be termed as a revival in the primary issue market, initial public offerings (IPOs) in recent months have evoked euphoric responses from investors - both retail and corporate. However, as compared to the boom in the early years of this decade, there are marked differences this time.
There are key structural differences as compared to the IPO market boom in the first half of the decade. First is the widespread and easy availability of IPO financing, which has permitted investors to take on leverage while applying for new issues. A significant aspect is the narrow investor focus on issues of software, pharmaceutical and media companies. Another key difference this time is the participation of mutual funds in the IPO market. These factors have increased the liquidity in the market leading to large over subscriptions.
The recent issues that have evoked a good response are TV18 (media) and Glenmark Pharma (Pharmaceuticals). While TV18 has been oversubscribed by 51 times, Glenmark has recorded an over subscription of over 55 times. Jointly, the two issues have evoked responses worth over Rs 54 bn. Even these amounts stand dwarfed against the HCL Technologies offering which managed to evoke a response in excess of Rs 200 bn.
Although this may seem as 'irrational exuberance' to many, the quality of offer documents has infact substantially improved over those in the previous years. This is mainly due to the fact that the regulator, The Securities and Exchange Board of India, has taken numerous measures to prevent fraudulent companies from accessing capital markets via this route. The confidence level in the market has tremendously improved since the 1994 primary market debacle.
Some factors that need to be considered are the effects of the secondary market on the IPO market and the possibility that some dud issues may enter the market. These two factors can have a critical bearing on the IPO boom. A decline in the secondary market could deal a deathblow to the IPO market as expectations of returns on listing of issues dramatically reduce.
The euphoria is currently centred on the software, media and pharmaceutical sectors as the listed stocks in these sectors have recorded dramatic gains over the past few months. These gains cannot continue to grow indefinitely at rates recorded in recent months and this could lead to expectations being marked downwards in the near future. The other concern is the possibility of some dud issues entering the market. This could significantly alter the risk perceptions in the market, affecting even good issues.
The course the stock markets take in the future is surely going to affect the fortunes of the IPO market. However, the possibility that some unscrupulous promoters would try to capitalise on this euphoria is what should be of prime concern for the regulator.
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