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The Law of ‘grieve’ty at work

The primary market is in a deep slumber. Even the renewed indications of a global
meltdown have just started creeping in. So the simplest thing for the companies planning
to dive into the capital markets now is to wait and watch, feels Gyanendra Kashyap...

Samat is literally terrified at the mere mention of an IPO (Initial Public Offering); and
why not, his euphoric success in terms of gains from IPOs has dampened like never
before. Little did he realise the strong correlation between the primary and secondary
market – as the secondary market tanks the primary market goes in for a long slumber.
Like anyone else he too was taken in by the fact that the 2007 success story of IPOs
(wherein 3 out of every 10 gave returns of more than 100%, 3 eroded the shareholders
wealth and the remaining gave returns much higher than the benchmark index) will
continue in 2008. To add to the greed of Samat and his ilk, the January sell out of the
largest IPO, Reliance Power, which sucked Rs.100 billion out of the market within
minutes, laid a solid foundation for bullish expectation from the market in the future to
come. But unfortunately, the bullishness started and ended there. What happened to
Emaar MGF and Wockhardt’s fund raising plans thereafter is well known. Well, the
secondary market which was at its meteoric heights early on in the year has so far tanked
over 30% and moving parallel the primary market offerings have also witnessed a sharp
decline (35 in first 7 months of 2008 as compared to 65 for the same period in 2007).

Meanwhile, one can see a few gladiators marching ahead to reverse the situation. But, the
question remains, will the forthcoming big IPOs be able to woo institutional as well as
retail investors and help the market get going? Samat who has burnt his fingers avers,
“Capital markets and investor sentiments determine the success of an IPO; as compared
to last year the public markets today are not so receptive to IPOs.” Sounds logical indeed!

The non receptiveness of the market was very much evident during the Emaar MGF IPO
process, wherein despite two rounds of price cut and a deadline extension it failed to
attract investors and finally had to withdraw the IPO from the market. A very similar
story holds true for Wockhardt. Both the companies moved out of the market citing the
adverse market conditions. The fact that IPOs just do not happen in a free fall corrective
market is reflected by the retardation in the number of listings (75, 96, 112 and now 35
respectively in 2005, 2006, 2007 and 2008 year to date).

Moreover, this has happened at a point of time when the regulator has moved a step
forward in making life easier for retail investors. Yet, companies have either withdrawn
themselves from the market or have preferred to stay out by allowing their IPO approvals
to lapse. As many as 16 companies (including the big names like Jaiprakash Ventures,
Reliance Infratel, and UTI AMC MCX, et al), which would have otherwise
collectively raised capital to the tune of Rs.165.39 billion, deliberately allowed the
expiry of their IPO approval from SEBI. Given the dull sentiment a number of other
companies must be planning to follow the suit (allowing the SEBI approval to lapse
by not hitting the market within 90 days of receiving the approval). Prithvi Haldea,
Chairman and Managing Director, Prime Database, explains, “All these companies
are unwilling to compromise significantly on their valuations, which are currently
very badly hit… the demand for new paper is obviously very weak in a market like this.”

Amid such a milieu, when the FIIs have been net sellers in the equity market to the tune
of Rs.285.25 billion, it actually makes very little sense for the large PSUs (NHPC, BSNL,
OIL INDIA Ltd, et al) who are planning to enter the market. Though the government on
its part is taking the initiative to bring in the much needed upthrust in the capital market
the question is, “Will the transition lead to an active market, and will it rejuvenate the
market?” The answer certainly depends on the willingness to invest on the part of the
investors. Speaking to 4Ps B&M, Jagannadham Thunuguntla, Equity Head, NEXGEN
Capitals Ltd. said, “Quality PSU IPO can certainly bring in the much awaited momentum
in the market.” But, he also agrees that there is not much willingness to invest at present.

The momentum is certainly lacking in the secondary as well as the primary market. And
even entry of these big size IPOs will not help the market get going. On the other hand, it
may put those companies in an awful condition. So the simplest thing the companies
wanting to dive into the capital markets should do is for the time being refrain themselves
from doing so and adhere to a wait and watch policy, if not pack off their baggages.
These companies must understand the fact that when the market is being governed by the
‘law of ‘grieve’ty’, even the best of the gladiators must keep his hands out of it. Else, it
won’t take much before he falls prey to the bears.
4Ps

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