Traditionally in India, retail investors have entered the capital market through the IPO route. However the Indian stock market has been particularly volatile in the past few years. The present scenario points to a dangerously shrinking investor population that has rendered the IPO (initial public offering) market almost inactive. It has become extremely difficult for the corporate sector to raise equity capital.
The financial year 2010-11 saw 72 firms cancel their IPO plans, and 58 Indian companies let their regulatory approval for their IPOs lapse in the 2011-12. In the same period, 34 firms issued their IPOs but raised only Rs 58 bn, which was the second lowest since FY05, when 23 companies raised a much larger amount of Rs 146 bn. Impacted by the dull market and uncertain investment climate, 22 firms have called off their IPOs targeted to raise an aggregate Rs 83 bn this year despite approval. The companies failed to launch their IPOs within the validity period. All these companies had Securities and Exchange Board of India (SEBI) approval for their IPOs.
There are several reasons why investor's interest in primary markets is fading away. First - Investors are worried about the quality of issue. IPOs are required to be analysed by rating agencies and graded according to the strength of the company's fundamentals. From poor to excellent, IPO grades range from 1 to 5. IPO grades are not meant to indicate whether to invest in the offer or not. But if grades are used as a yardstick for quality, issues have taken a dip off late. In 2011, for instance, six of every ten issues that came up were classified as having poor fundamentals. What makes it worse for investors with a long-term perspective is the performance of the issues on the bourses once listed.
Second - The IPO market distributor faces several challenges. The investment bankers offer very low and unprofitable commission to brokers. Investment bankers are able to get IPO applications through cartels operating out of a few metros, by paying higher commissions to them who, in turn, sell the shares immediately after listing. Thus there is an urgent need to address this basic problem, even if it means that an issuer has to incur an additional 2% cost for an issue in the interest of post-listing stability.