Primary froth

When a bull market is in full charge, primary market action seldom lags. It is, therefore, not surprising that with India’s stock indices up 74 per cent last year, recent months have turned out to be brisk ones for IPOs (Initial Public Offers). Of the ₹31,277 crore raised by 30 new issues in FY21, 60 per cent was garnered in the latest January-March quarter. While it is certainly a good thing that companies in sectors as diverse as agro-chemicals and gaming are able to raise equity despite the Covid, three-digit over-subscription for recent offers, individuals borrowing big for IPO bids and wild swings in recent new listings point to speculative excesses building up. Such frenzy for IPOs has not boded well in the past, with the dotcom bubble of 1999-2000 and the capex bubble of 2007-08 both ending after similar episodes.

To be sure, the quality of companies soliciting investor money in the current IPO boom is far superior to those in the previous ones. Concerted efforts by Securities Exchange Board of India (SEBI) to keep fly-by-night issuers at bay with its stringent perusal of offer documents, stiff penalties for poor disclosure and more merchant banker accountability are a key reasons for this. With the window between allotment and listing down to three days from three weeks, the leeway available for market intermediaries to meddle with allotments or pricing has shrunk, too. Most of the current crop of IPOs is also from private equity-backed ventures, making for a better financial and governance record. But retail investors should note that all this does not make IPO investing a low-risk affair. For one, while the current crop of IPOs may score on pedigree, the presence of private equity investors has made for stiff asking prices, as these investors seek to meet their high hurdle rates of return on exit. Some recent offers were priced at three-digit price-earnings multiples on annualised earnings for part of the year. Two, easy availability of IPO funding has led to the rampant practice of high net-worth individuals (HNIs) leveraging to the hilt to maximise allotments and punt on listing gains. Leverage has led to over-bidding for even middling offers, with stock prices collapsing post-listing as short-term punters cash out. Three, off-market punting in IPOs continues to thrive with grey market premia widely shared and retail investors using them as the primary basis for selecting IPOs.

Yes, one can be thankful that primary market excesses in India have not yet reached levels prevalent in the US, where retail folks are rushing into blank-cheque Special Purpose Acquisition Companies (SPACs). But Indian regulators do need to remain vigilant on prevailing malpractices to ensure that this IPO boom doesn’t end in grief for long-term investors and genuine issuers. SEBI must crack down on the wide circulation of grey market premia and use its investor awareness coffers to propagate the right way to read the IPO prospectus and analyse the issuer.