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BW Businessworld

Battle Of The Indices

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On 24 August, the Bombay Stock Exchange (BSE) launched an IPO (initial public offer) index, to help investors track the value of companies for two years after their listings on the bourses. This could mean that returns from investments in the IPO offerings can be significantly different from investing directly in companies already listed in the secondary market.

Not everybody agrees with such a notion, though. "On listing, every IPO becomes a secondary market stock and all factors that affect the latter will affect the IPO stocks," says Prithvi Haldea, managing director of Prime Database, a primary market research company.

The western markets have only a handful of them — such as Dow Jones Stoxx IPO indices (3- month version, 12-month version and a 60- month version), which track European IPOs, the FTSE Renaissance IPO Composite Index, which tracks the entire US IPO market and the NYSE IPOX US Index, which  tracks American companies' IPOs on the NYSE Euronext.

The BSE has pegged the base date and value for its IPO index as 3 May 2004 as 1000. An analysis of the past five-year values of BSE IPO index with that of 30-stock BSE Sensex reveals that the IPO index is lagging behind. However, the picture is different in Europe (see ‘Primary Vs Secondary'). This makes it a huge deterrent to potential index funds or exchange-traded funds (ETF) on the BSE IPO index. "If the IPO index has underperformed the main secondary market index in a market where IPOs were a hit, it is difficult for investors to find attraction in an ETF based on it," says Sanjiv Shah, executive director at Benchmark Asset Management.

The Indian IPO market lures investors in hordes in the fervent hope of making a killing on the listing day. Allotments are not guaranteed and during a bull run, almost all IPOs get oversubscribed by multiple times. The Indian IPO market acts like a lottery system where lucky allottees are able to sell the stock immediately on listing at 10-40 per cent higher than the issue price.

Under the methodology for the IPO index, all IPOs with a minimum listing day free-float market cap of Rs 100 crore will be eligible to be included in the index from the third day after listing. Two years after listing, a stock will be removed from the index.

The BSE has tended to adopt methodology features from the overseas IPO indices except for fixing the inclusion day as soon as the third day from the listing date. The Dow Jones Stoxx IPO index in Europe, for instance, includes a stock on the second Wednesday after listing, which means 8-14 days later. "The first two-three days from listing can bring in unusual price movements till the price discovery smoothens out," says Haldea.

The problems associated with the Indian IPO market, such as allotment uncertainties, can create distortions for the IPO index. Since on the third day traded price of most IPOs during a bull run is 20-50 per cent higher than the issue price, the inclusion price is always high.

Often, after true price discovery, the stocks take a severe correction.

(This story was published in Businessworld Issue Dated 07-09-2009)