On the IPO roller-coaster

As the old saying goes, there is many a slip between the cup and the lip. Industrialist Anil Ambani had a lucky January when the country’s biggest initial public offer (IPO) of shares by Reliance Power met with thumping success. But Monday was a day of reckoning. On listing in the bourses, Reliance Power’s shares fell by 17 per cent from its issue price of Rs 450 to Rs 372, while the ‘grey’ market had been speculating about a premium listing. Much of the change in scene may be attributed to global happenings that have changed the local mood after the IPO.

It so happened that the world markets became more concerned about a possible US recession in the period following the share issue. And, India’s gross domestic product growth rate for 2007-08 was estimated at 8.7 per cent, below the expected 9 per cent. Unlike Reliance Power, two other IPOs, one by Emaar MGF and another by Wockhardt, had to be called off. All these facts only show the fickle nature of free markets, in which highs and lows are a part of life. However, IPOs are something else. A lot of the glamour attached to IPOs can be traced back to the 1980s, when bureaucrats decided the price of a share, which on listing would often lead to multiple gains. In a cash-flush market in the middle of an ‘India story’ boom, much of that sentiment has held on in the years following the launch of economic reforms in 1991, which ended government controls on share pricing. These sentiments are managed by fund managers, analysts and merchant bankers. Company promoters are only too eager to lap up investible funds from the public.

Given that shares are often priced on the basis of the future performance of a company, IPOs tend to be controversial when prices fall. So who cleans up the mess? There are no easy answers, but the Securities and Exchange Board of India must educate investors to underline the fact that equities involve risks. Efforts have been made to rate IPOs, and analysts are also increasingly candid in their appraisals. For small investors, it is important to understand that share prices often lie in the eyes of the beholder.