Wednesday, August 09, 2006

Investing In Primary Market IPOs

I have been a regular investor in the IPO or Innitial Public Offering of shares in India, and have learnt bitter lessons that i think small shareholders ought to know before they invest their hard earned money in the markets.
As it is all small shareholders and small investors are the most uncared and unprotected lot of market participants, thanks to an inefficient and powerless reactionary regulator like SEBI, and to the collusion of big business and politics leading to poor safeguards and adherance to standards and namesake fines.
The managements and promoters of listed cos are well known for lack of accountability and are seldom punished for rampant insider trading or window dressing of balance sheets or selective disclosures.
The Rules I try to follow are Simple
1. Never invest in IPOSs for the long term as 8 out of 10 listings will never quote anywhere close to their listing prices.Most Midcap listings can give u substantial Losses or in rare occasion substantial Gains over the longer term. Never take the safety of Govt/Psu listings for granted as most of them will quote below or close to listing price, and on a longer term will eventually be loss making(eg.ipos of idbi, ifci, vsnl,ongc,gail etc).Maruti being one of the rare exceptions as Suzuki virtually took over the Cos management and decision making.
2. Avoid greed and invest in ipos of companies or promoters with a good track record offered at a good PE multiple and track ur investments religiously. Dont overextend and borrow funds for IPOs.
3. If u intend to play the market, expect suffering heavy Losses in the Primary markets when Secondary Mkts take a turn for the worse, especially if have borrowed funds to invest in IPOs.It is prudent to keep in mind that the record breaking Reliance Petro IPO that was subscribed a whopping 47 times now quotes close to its listing price of Rs 60.
4. The IPO mkts have always been Fixed and abused since the days of Fixed Price IPOs. One has to know the rules of the game and act accordingly.Dont get carried away by the Xtimes subscription in QIB or HNI catagory in the current Book built Ipos as the books are mostly cooked.QIBS dont pay money upfront and mostly pull out or reprice at the last moment, or have the ability to stomach losses.HNIs are a savvy lot and dont hold shares for more than a week post listing.Retail investors on the other hand have to pay 100% money upfront and have to deal with pathetic service and allotment and refund delays from the likes of Kaarvy Consultants(made infamous in demat scam and ipo allotment scam) and MCS.
5. Take profits and cover your costs at every market rise.

Here is a Historical Perspective
Since the days the controls over pricing were abolished in 1992, IPO pricing has been deregulated from the grasp of the CLB and Companies were free to raise funds at fancy prices and unheard of premiums.
The first thing that happened was change ratio of funds garnered in debt ipo:equity ipo which jumped from 17.3:40.0 billion in 1992 to 99.8:98.4 billion wherein funds collected for equity ipos equalled the debt ipos for the first time.
The 1990s period saw a big boom and a sudden rush of retail investor money.It was like the wild west period and a huge number of companies most of which had dubious promoters somehow managed to garner substantial amt of funds in the primary markets,from retail investors still stuck in the 80s mindset, thanks in part to a new creed of saavy merchant bankers, brokers, agents and publicity managers.
There was little regulation and the earnings projections were vastly out of tune with reality.Most IPO prices were highly overvalued and in most cases, it appeared as if the price had been fixed, and the revenue and earnings numbers fudged to justify Premiums.Merchant Bankers and in collusion with market manupulators were known to ramp up pre ipo share prices in the primary markets so as to to get a favourable response.
The IDBI ipo that listed in 1998, which was my very first ipo investment, is a case and point.The stock never traded at or above its ipo price for more than a weak post listing and subsequently traded well below that price and it is needless to say that i incurred a loss on selling them.
Another trend was that of Vanishing Companies wherein many promoters who garnered funds in the 90s simply vanished with the funds or diverted funds living plush lives in foreign lands while leaving their shareholders in a lynch.
The government has kept up the charade of continuing to investigate such dubious entities and promoters and but all that they can show for their efforts is to put up a list of companies which disappeared, and not a single promoter was ever punished or brought to book.The Harshad Mehta scam 1992,the Ketan Parekh Scam and the UTI64 Scam(which i had a whiff of and i sold 99% of all my US64 units in May)mainly due to rampant political interference in decision making by both Congress and Bjp and to an Unaccountable and Corrupt Chairman Mr PS Subramanyam(who finally got away)and self serving Fund Managers shook the foundation of the market.Most entities that profited got away thanks again to the poor regulation,wilful connivance and political intreferance to prevent secrets from being outed.Read the scam by Sucheta_Dalal)
We also saw the rise and subsequent tech bubble meltdown in 2000 wherein a lot of Infotech ipos like HCL Tech,Melstar,Polaris, Aftek, DSQ etc saw a steep rise and subequent fall to levels way below ipo allotement prices.
This collective Corporate greed ensured that the Primary markets remained dormant between 1998 and 2001,and the number of IPOs could be counted on the fingertips.
The only positive thing that came about was better regulation and disclosure norms in both the Primary and Secondary Mkts by the SEBI in the very capable hands of Shri Ghyanendra Nath Bajpai(Ex LIC)and Mr Damodaran(credited with cleaning up UTI).

In 2003/04 the IPO mkts revived and IPOs such as Maruti Udyog and Canara Bank gave substantial gains to investors. This and other economic factors such as big ticket disinvestment in cos like ONGC GAIL NTPC etc and an adverse economic climate in the US led to a boom in the Secondary markets and a rerating of India by Foreign funds and substantial investments by American funds and Japanese funds including long term Pension funds and hot money from hedge funds.
This opened the floodgates and the period between 2004 and Apr 2006 saw a boom in the primary markets.The Upturn in US and Japanese interest rates and overvaluation in the markets lead to a fall in markets in June 2006.
History has repeated itself and most substandard IPOs listed between 2005 and 2006 are currently trading below ipo allotment prices.
So people just remember the good old CAVEAT EMPTOR (may the buyer beware) still holds good.


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