Illustration: Anthony Lawrence

Blame the meltdown in global equity markets in January - in the middle of a colder than normal month. But how much of a link is there between the secondary markets that saw huge losses, and the primary markets, where capiutal is being raised for ostensibly good projects? “Sentiment is a common thread between primary and secondary markets,” says Pankaj Vaish, MD and head of equities and fixed income liquid markets at Lehman Brothers in Mumbai. “Aggressively priced IPOs and those with massive oversubscriptions, without full financing, can signal that perhaps the market is getting too hot, as they did most recently.”

While the weather has gotten warmer, the once red-hot IPO market has been reduced to cold ashes. In what under normal conditions would have been a breeze, three high-profile IPOs — Wockhardt Hospitals, Emaar MGF Land and SVEC Constructions — had to first revise their pricing downward, then extend the dates on which subscriptions would close.

The price revisions were not small either; they ranged from 10 to 20 per cent, and issue closing dates were extended by two to five days. But all to no avail. Despite all the tea and the burning of midnight oil, all three of the aforementioned companies had to withdraw their IPOs due to complete lack of investor interest.

“The potential reputation risks to our clients were weighed in the context of the loss of credibility that it will suffer if at the close of the IPO bidding period the issue was not even fully subscribed,” says an official of one of the leading investment banks involved with the Emaar IPO who did not wish himself or his firm to be identified.

Emaar revised its book building price band from Rs 610-690 to Rs 530-630 and then extended its offer period of 1-6 February to 11 February. At the close of subscription on 8 February, subscriptions from FIIs and domestic institutional investors were just 29 per cent; the retail segment met 47 per cent of its quota, and the non-retain non institutional investor category: 78 per cent. The lukewarm response from FIIs scared the company and its book running lead managers, Enam Securities and DSP Merrill Lynch, enough to withdraw the issue on 11 February. The Wockhardt Hospitals IPO fared even worse, collecting just 6 per cent in its institutional investor quota, 51 per cent of retail investors and just 5 per cent in the third category.

Where Have All The Investors Gone?
At one end of the spectrum, at the trading desks of FIIs and the homes or workplaces of individual high net worth or retail investors, the dynamics of the analysis of the fundamentals of the IPOs was undergoing a subtle transformation. “Realisation is dawning on many investors that IPO valuations may be on the high side,” says Stuart Smythe, executive director and head of equities, Macquarie Securities India. “They are becoming rational now and their risk appetite has been moved by recent global market weakness.” In these times of increasing volatility across all markets, the preservation of capital and managing existing positions becomes a priority for global equity fund managers, rather than trying to build new positions, he adds.

For retail investors, the Reliance Power IPO was a rude wake-up call about the vagaries of the market. The stock was expected to list at close to Rs 1,000, going by the trade in the grey market. While it did open higher than the offer price of Rs 450 on 11 February, by the end of the trading day it closed down much lower. Secondary market behaviour since then has been erratic; the Bombay Stock Exchange Sensitive Index (Sensex) has been behaving like a yo-yo.

One segment that has been severely affected are the leveraged HNIs (high net worth investors) who took severe losses on IPO bets gone wrong, particularly Reliance Power IPO. Even as BW goes to print, there are settlement problems in the grey market, with investors unable or unwilling to pony up on the wrong bets they placed. For HNIs, the IPO market is going to be off-limits, at least for a while.