Boom and bust

On January 15, even as Anil Ambani’s Reliance Power IPO was getting oversubscribed within 60 seconds of it inviting bids, the stock markets were falling. By the end of the day, India’s biggest ever IPO (Rs 11,700 crore) had offers for 10 times the number of shares on sale, but the Bombay Stock Exchange bellwether index, Sensex, was down 476.96 points to 20,251.09. It’s hard to say if Reliance Power’s IPO, which eventually was oversubscribed 73 times, would have been such a spectacle had it been launched just a week later. For, Dalal Street looked very different when BT went to press early third week of January. In just five trading sessions (January 14-21), the Sensex had shed 4,000 points and stood at 17,605.35, having recovered from an intra-day drop below 17,000. What’s happening? Worried over a possible recession in the US, foreign institutional investors are pulling out money from Dalal Street, thus sending stocks into a tailspin. The markets may not recover until that money comes back. That’s unlikely to hurt economic growth in the short term, but it almost certainly will jeopardise the chances of IPOs waiting in the wings.

Over the last few years, IPOs have had a dream run on the stock markets. A booming secondary market, debut of good quality stocks at attractive prices, and the overall India growth story have been the primary reasons why IPOs have done so well. In 2004, when ONGC tapped the primary (read: IPO) market, the portion reserved for retail investors was not even fully subscribed. By contrast, the retail portion in the Reliance Power IPO was oversubscribed 14 times. What got the retail investor interested in IPOs post-2004 were the huge gains most of them delivered following their listing on the stock markets. In 2007, for example, more than 70 per cent of the IPOs gave positive returns to investors, with 84 per cent of them offering investors an exit at a premium on the date of listing itself.

Restrictions on overseas borrowings and the need for capital in a booming economy will see many companies launching mega IPOs this year. If the economy continues to grow at 8-9 per cent a year and the secondary market recovers, then the primary market will continue to flourish the way it has in the recent years. After all, there are several high-quality IPOs on the cards and the investor appetite appears robust. In fact, it shouldn’t be surprising if companies raise nearly $20 billion (Rs 80,000 crore) in 2008. However, whether that materialises will depend on how quickly and how much the secondary market recovers.