With sub-prime jitters resurfacing amid worries of a possible recession in the US and investors pulling out money to subscribe to the big-bang initial public offering of Reliance Power, which opened for subscription on Tuesday, the benchmark Sensex of the Bombay Stock Exchange oscillated 737 points before recovering most of what it lost to settle at 19,868 points (down by 383 points, or 1.90 per cent).
"Worries of more sub-prime losses for US banks and those of a possible recession in the US triggered this fall. On top of this leveraged investors faced margin calls and had to sell, which accentuated the fall. If US markets do not recover today, there could be more downside tomorrow morning," said Arun Kejriwal, director of Kejriwal Investment Services.
Further, retail investors have been selling shares in the secondary market to subscribe for the Reliance Power IPO, said brokers.
"Retail investors are selling their holdings, even heavily in some cases, to subscribe to the Reliance Power IPO," said Rahul Nangalia of Nangalia Securities.
According to data available on the BSE website, the Rs 11,600 crore Reliance Power IPO was oversubscribed at a staggering 13.92 times the number of shares on offer. The company has put on offer 22.8 crore shares to the public. Assuming that the applications have come in at the higher price band of Rs 450 and the entire amount is paid up, at 13.92 times, the issue has already sucked out Rs 1.42 lakh crore in application money. A part of this comes from the secondary market as retail investors are known to have sold their existing holdings to subscribe to the issue.
Indian markets have historically shown weakness ahead of big-ticket IPOs as investors sell their holdings to subscribe to the fresh issues. It may be recalled that the Sensex dropped more than 4 per cent in 10 days just before the DLF IPO opened for subscription in June 2007.
Though the US equity markets could edge lower after JP Morgan Chase posted a 21 per cent decline in fourth-quarter net income and wrote down $1.3 billion in sub-prime loans, Wednesday could see domestic equities opening on a weak note. The big boy Reliance Industries which will announce its third quarter results on Thursday is expected to match Street forecasts and give strength to markets.