The second question that looms large is one of valuation. The fact that majority of IPOs in the last year have listed at a 10-100 per cent premium over the offer price raising questions about whether the fundamentals of the business and the markets justified the price. "If an IPO is priced at a premium to regional and local peers, global money managers struggle to justify assessing a new offering at a premium, when their existing holdings are at discount, or comparables are trading at fairer values than a new offering," says Macquarie's Smythe. For instance, the price to earnings ratio of Emaar, a realty company, was much higher than the listed realty stocks like Unitech and DLF that had fallen steeply in the secondary market slide.

Will Sanity Return
The secondary market prices of newly listed IPOs have also seen a correction in their prices (see 'IPO torpedoed'). The most dramatic case was the Rs 10,123 crore IPO issue of Reliance Power. Issued at Rs 450, with a discount of Rs 20 for just the retail investors, it got listed on 11 February. It was the first big IPO in recent history that traded at a discount to the issue price on the day of listing. Its average traded price on the National Stock Exchange was Rs 416.80.

"We buy IPOs on the basis of rock-star like chief executives, rather than reading the offer documents about associated risks," said an investment banking official of a global investment bank. "IPOs are the high beta version of the secondary market." Beta is a measure of a particular stock's volatility in relation to the market. High betas imply high volatility, which explains in part, post-IPO performance of some stocks.

Though not completely unexpected, the dramatic withdrawals of IPOs have bought the investment bankers to some senses. So will things change? Lessons have been learned, and taken to heart. But as a laboratory for the study of human behaviour - in particular, the triumph of temptation over reason - the field of money management and 'investing' has much to recommend it. A study of people who bet regularly on horses showed that more information increases bettors' confidence in their bets, but not their accuracy. So change is unlikely.

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With inputs from Srikanth Srinivas
(Businessworld Issue 19 - 25 February 2008)