The Hindu Business Line : `It would be harsh to close the retail window in IPOs'

Good IPOs are not identifiable by size. You can have some really good projects from small companies and doubtful ones from big companies. Just like in the secondary market, it is becoming more difficult for the person on the street to identify the good opportunities in the primary market. — MS DIPTI NEELANKANTAN

Spending over two and half decades in investment banking has not made Ms Dipti Neelakantan sceptical of the recent stock market rally. She believes that the present bull market is different from the others before it, because for the first time the "India story" is really being noticed and believed in by global investors.

Ms Neelakantan is currently the Managing Director of JM Morgan Stanley Private Limited and Acting CEO of JM Mutual Fund, having joined the group in 1981. She shares, with Business Line, her views on IPO pricing and the perceived liquidity crunch.

Excerpts from the interview:

Several mutual funds that have raised money through new fund offers are waiting for a correction before they deploy the money. Is this a good time to invest?

My own view is that in any market, there are always winners to pick. I am a very firm believer in equities, but in equities for the long term. The problem is that most mutual funds are structured as open-end funds and you are not sure if the money is in for the short term or the long-term. This makes investment difficult. If the investor recognises that he has to stay with a fund for the long term, these problems will not arise.

I've seen a hectic debate on valuations ever since the market touched the 7,000 level. But there has been a 50 per cent gain since that level. I believe that we are in a completely different phase of the stock market that I've not seen in my career. This time, not only is there economic growth in India, this is being noticed and believed in by the world.

As long as investors like this market, we are not going to see a steep correction. Yes, as market players, we too would prefer a gradual rise in the market rather than the rapid ascent that we are seeing. But even as we speak, over 500 global investors are in India to attend investor conferences organised by players such as Citibank and Morgan Stanley. If these investors carry a positive message, that will create more interest in the Indian market.

Is the IPO pipeline running dry? After seeing quality IPOs through last year, we are now seeing quite a few of questionable quality...

I don't think the pipeline is running dry. In any bull market, you are bound to get a share of IPOs to fund doubtful projects. And these are not even identifiable by size. You can have some really good projects from small companies and doubtful ones from big companies. Again, just like the secondary market, it is becoming more difficult for the person on the street to identify the good opportunities. But IPOs, both from large companies and small ones will keep coming. I don't see any change.

Is the present method of book-building really helping price discovery? Investors seem to be forced to bid at the higher end of the price band to get allotment.

Most retail investors do not put in the price, instead they bid at the cut-off price because they are not equipped to determine the right price for an IPO. Even if I were to invest in an IPO, I would not usually put in a price. I feel that is best left to fund managers. But one thing I can tell you is that pricing an IPO is always related to whether it is made in a bull market or in a bear market. In a bull market, prices invariably get fixed at the top end and in a bear market it is difficult to find takers even for good offers, at a modest price.

I have been through two or three bear phases in my career. The last one was when we tried to place the Bharti Tele-Ventures IPO. The offer was not stiffly priced, but people were sceptical about the offer, even at the lower end of the price band.

It was a relatively small offer by today's standards... only Rs 800 crore. But nobody would touch it! Post-offer, the stock even went down to Rs 22. The same book-building process was in place at that time; but that did not influence bidding.

So, the pricing of an IPO is not determined by the process used to discover prices, it is more a function of the market conditions. In a bull market, suppose an offer is made at a price band of 80-100. Even if I believe that Rs 100 is slightly stiff for the stock from a fundamental perspective, I will still subscribe to it. This is because I know that the technicals — the demand for the stock — will take it to Rs 120. That is why offers get subscribed at the higher end in a bull market.

I think that today primary market pricing has been brought really close to secondary market pricing. Unlike the early days, there are no controls or formulae determining primary market prices. Therefore, both the primary and secondary markets are driven by much the same factors — demand and supply. If infrastructure issues get sorted out, the pricing will get even closer. Today, there is a time risk in IPOs because you cannot sell the stock immediately; you have to wait for quite a while before it lists.

You can do that in the secondary market. It has taken a lot of time for the secondary market to reach the level of maturity that there is today on the electronic trading platform. Putting in similar infrastructure in the primary market will require work. But it will eventually get done.

Should the quota for retail investors in IPOs be done away with?

As long as retail investors wish to be in the primary market, the window is required. To close the window would be too harsh. At the very early stages of book-building, we used to have a system where the retail window was opened after the institutional bidding was closed.

We could consider introducing something like that. But the problem with that is that it elongates the whole offer process. FIIs that invest in IPOs will not want to bear more time risk. The second hitch is that any offer can go through only with a 90 per cent minimum subscription.

Yet, with 35 per cent of an offer reserved for retail investors, you do not have a clear picture about the offer if you open the institutional window, representing 65 per cent of the offer, first. The project needs certainty about funds. These are some of the points that need to be addressed. I am not too worried about investors using multiple accounts to corner allotments in an IPO. That is very easy to block structurally.

Some institutional investors have expressed fears that a liquidity crunch could derail the India growth story. Banks are stepping up lending, but do not have enough resources to keep up with the demand...

The tight liquidity situation in March is an annual phenomenon. March 15 is also the due date for advance tax payments In fact the tight liquidity is, in a way, good news because banks are actually deploying the money in the corporate sector, which has not happened in a long time. Earlier, banks were sitting on a lot of extra cash and they always invested surplus money in government securities. They used to be very selective with their lending, investing only in AA plus kind of candidates. Now they are broad-basing their lending.

Secondly, the Government has not been releasing any money into the system. So, that should change in April. When infrastructure spending starts taking off, we should start seeing more liquidity. If we have to grow, the Government is going to make sure there is money to fund growth.

The Budget has also announced tax incentives for five-year deposits with banks. This will improve the availability of long-term funds with the banking system. This move also sends out a positive signal. I see it as yet another statement that the government is keen on promoting long-term investing — not just in equity, but also in debt.

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