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Dialing the right number

india Updated: May 22, 2013 23:26 IST

Lots of people — from promoters of companies to institutional investors to individuals — were waiting to see how local search engine JustDial’s R950 crore initial public offering (IPO) would fare. The good news is that it has been oversubscribed almost two times. Market experts say the JustDial issue could set off a virtual circle wherein other companies feed off its success and launch public issues, thus, leading to larger funds mobilisation by the corporate sector. A vibrant primary market is critical for an emerging economy like India. It channels household, corporate and institutional savings into productive sectors, provides companies with a cheap source of funds, and offers investors potentially high returns that fixed-return instruments like fixed deposits can’t match. Most importantly, it will allow companies to access funds they need for their expansion plans and kickstart stalled investments, which will help create jobs and spur growth.

Merchant bankers say dozens of private sector companies with fund-raising plans of their own were keeping a hawk-like watch on the JustDial issue. They will, hopefully, now be encouraged to follow its lead. An interesting feature of the IPO was the “safety net” provided for retail investors. Under this, the promoters have undertaken to buy up to 1,000 shares each from individual investors if the market value of the scrip falls below the issue price within a given time frame. This has played its part in shoring up investor confidence, which had been down in the dumps for the last three years. The government should also be pleased at JustDial’s success. Its plans to raise R40,000 crore this year from the disinvestment of stakes in public sector companies such as Coal India Ltd, ITDC, and National Fertilizers Ltd, among others, depend on strong investor sentiment for such instruments. A successful divestment programme is critical for the government’s finances and, thus, for India’s economic health.

A word of caution: the feel-good factor created by the successful IPO can easily turn to panic if investors burn their fingers. So, companies must also take care to price their issues competitively, and investors must take care to back only companies and promoters with proven track records.