In a recent blog Prof. J R Varma, quoting a research paper by Adam Pritchard, argues that it is high time we abolish IPOs! Weird, as it may look, but when one reads Prof. Varma's blog (http://jrvarma.wordpress.com/) as well as the paper by Pritchard (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2103246), one is forced to believe their argument. Pritchard explains that an IPO does not add value to any stakeholder including the issuer and the investor; and those who make money from IPOs are the people who manage the issue. These people/agencies are paid a specific percentage of the issue size, which is known as 'floatation costs'. Pritchard suggests a two-tier market system, where the companies would be first allowed to trade in a market where the participants would be Qualified Institutional Buyers. Once a company matures in the Tier I market, it would be allowed to move to Tier II, which would be open to retail investors.
Way back in 1997, I was involved in a project to analyse the post-issue performance of the IPOs that flooded Indian markets during 1993-94. (Incidentally, Indian markets witnessed maximum number of IPOs during this period). We found that majority of the issues were trading below the issue price and many companies had vanished into thin air. Compared to 1994, today, Indian markets have matured a lot in terms of regulation, disclosures and compliance. However, the IPO market continues to be a gambling zone. On one side we have issues like Vaswani Industries (October 2011-Issue Price Rs.49 & Current Price Rs.4.76) and Indo Thai Securities (July 2011-Issue Price Rs.74 & Current Price Rs.9.75); and on the other side, we also have Onelife Capital (October 2011- Issue Price Rs.110 & Current Price Rs.648.10). The story is not different in developed countries either. Take for example the much-hyped IPO of Facebook. The shares issued at $38 in May this year are currently trading at $18.80 in Nasdaq and the firm is embroiled with more than 40 lawsuits. If a firm trades at huge discount or at huge premium on listing, it reflects the inefficiency of the primary market.
In the wake of the above, I pray that the Government appoints a committee headed by Prof. J R Varma (who has already been a member as well as Chairman of several committees) to restructure the IPO market; the committee comes up with revolutionary suggestions; and above all, the Government accepts and implements these suggestions. Are the bosses at the Finance Ministry and SEBI listening....?
Way back in 1997, I was involved in a project to analyse the post-issue performance of the IPOs that flooded Indian markets during 1993-94. (Incidentally, Indian markets witnessed maximum number of IPOs during this period). We found that majority of the issues were trading below the issue price and many companies had vanished into thin air. Compared to 1994, today, Indian markets have matured a lot in terms of regulation, disclosures and compliance. However, the IPO market continues to be a gambling zone. On one side we have issues like Vaswani Industries (October 2011-Issue Price Rs.49 & Current Price Rs.4.76) and Indo Thai Securities (July 2011-Issue Price Rs.74 & Current Price Rs.9.75); and on the other side, we also have Onelife Capital (October 2011- Issue Price Rs.110 & Current Price Rs.648.10). The story is not different in developed countries either. Take for example the much-hyped IPO of Facebook. The shares issued at $38 in May this year are currently trading at $18.80 in Nasdaq and the firm is embroiled with more than 40 lawsuits. If a firm trades at huge discount or at huge premium on listing, it reflects the inefficiency of the primary market.
In the wake of the above, I pray that the Government appoints a committee headed by Prof. J R Varma (who has already been a member as well as Chairman of several committees) to restructure the IPO market; the committee comes up with revolutionary suggestions; and above all, the Government accepts and implements these suggestions. Are the bosses at the Finance Ministry and SEBI listening....?
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