The Hindu Business Line : NCAER study sceptical of IPOs

EVEN as the disinvestment of public sector oil companies through the initial public offer route has generated euphoric response among retail investors to the comfort of the Disinvestment Ministry, the National Council of Applied Economic Research (NCAER) has voiced qualified misgivings about the eventual success of IPOs, going by international as also Indian experiences.

In its latest Macro Tack, a monthly bulletin on policy issues, the council said India's first experience with big-ticket public sector IPOs — Rs 15,000 crore in just 45 days — came last month, but it was shrouded in controversy. Within 10 days of the announcement of the IPCL offer, the Bombay Stock Exchange index lost about 450 points.

When the issues were announced, there were fears about a flood of paper in the market, the council said, adding that the possibility that investors would trim their holdings in stocks to make cash for the IPOs was real.

Stating that whenever there is an announcement of a public offer, the first instinct of the investor was to sell at least part of the existing holdings, the council said this was evident when the ICICI Bank stock tanked from Rs 340 to Rs 265 when it announced its Rs 3,000-crore issue or when Ashok Leyland announced its $100 million foreign currency convertible bonds.

"While there is ample liquidity in the system and enough evidence to suggest that FIIs are convinced about the India story, the fear of a deluge of paper did prompt a good many investors to book profits in IPO stocks. In fact, barring the Dredging Corporation of India, others such as ONGC, GAIL and IPCL lost between 20 and 30 per cent from the top. The valuations of some such as ONGC at Rs 900 levels, were not inexpensive, given that ONGC is going to continue to subsidise LPG and superior kerosene oil," the council noted.

It said the Government could well have held back a couple of issues and focussed on the really important ones such as ONGC. That would have eased the pressure, given that the Government is not the only borrower today and there were some attractive offers such as Biocon or Dishman. It said that internationally too, the experience is that IPOs underperform. A study of 4,753 IPOs between 1970 and 1990 in the US showed that during their second six months in the market the new issues lost 1.1 per cent. Another study of the US market shows that of the nearly 5,000 IPOs initiated between May 1988 and July 1998, nearly a third no longer traded their stocks and 44 per cent sell at a market price below their original offer price.

Pointing out that conflicts of interests and potential abuses are rife in the distribution of new issues, it said IPOs are inevitably timed to benefit the seller, not the buyer, aiming to extract the maximum value from the market. Research reveals that IPOs are far more likely when valuations are high than when they are average or low. They seem to be fixtures of a bull market. The Indian experience has, if anything, been slightly worse because of higher volatility in the market here, it said.

According to the council, IPOs are frequently underpriced to attract heavier buying on day one. Second, IPOs do not do very well on the second day and later. Third, retail investors should therefore be careful and fourth, getting the IPO price absolutely right is next to impossible and finally there needs to be a better control over the expenses of an IPO, the council concluded.