Warning bells

Will India’s primary market boom, which has just begun to take wing, come to an unceremonious end? Leading voices in the stock market are beginning to warn of this. Last week, after reiterating his bullish view on India, market maven Rakesh Jhunjhunwala cautioned investors to stay away from IPOs (Initial Public Offers) citing “a lot of froth” in the segment. Response to recent offers suggests fatigue, with over-subscription numbers dwindling from 75 to 100 times the offer size until mid-September, to a muted 1-5 times. Listing gains also appear to be evaporating with recent debutants such as Khadim, New India Assurance, Mahindra Logistics, GIC Re and IEX slumping below offer price.

If such warning signs make Indian investors moderate their return expectations from IPOs, it is by no means a bad thing. As vehicles for wealth creation, Indian IPOs have a pretty poor record, with 57 per cent of offers which made their debut in the last ten years delivering losses. Primary market booms in India have always ended in grief for investors because such booms have been the cue for firms with dubious credentials to tap the markets, only to vanish without a trace later. Since 2010, SEBI has effected a substantial clean-up by tightening the screws on issuers, seeking elaborate disclosures, tightening its own scrutiny and requiring merchant bankers to disclose their track records. But while all this has raised the quality bar on issuers, it hasn’t done much to curb avaricious pricing. In the ongoing boom, consumer firms launching IPOs have thought nothing of demanding a price-earnings multiple of over 200 times their annual earnings, life insurers have set their asking prices at over four times the embedded value, and even public sector enterprises have priced their offers basking in a big bull market premium. If high hurdle rates for private equity investors set a high bar on valuations for private sector offerors, the Centre’s keenness to maximise its disinvestment proceeds seems to be driving high asking prices for PSUs. But the recent debacles on listing and dwindling public response to recent offers should hopefully serve as a red flag to these issuers that over-the-top pricing can kill the goose that lays the golden eggs.

It would certainly be unfortunate if recent excesses nip the incipient primary market boom in the bud. A vibrant primary market is critical to the health of the economy as well as capital markets. The IPO window needs to be open for domestic firms to de-leverage, for unlisted firms to unlock the risk capital put in by private investors, and for the Government to realise its policy objectives of privatisation and disinvestment. But most important, without a thriving IPO market to infuse new blood into the listed universe, there’s the danger that the flood of retail money surging into equities lately will end up chasing a stagnant pool of investment opportunities.

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