Tripped Up At Start

On the evening of 9 May 2012, Shrikant Zaveri, chairman and managing director of Tribhovandas Bhimji Zaveri (TBZ), was partying at the Crystal Room at the Taj Mahal Hotel in Mumbai to celebrate the raising of Rs 200 crore from the Indian equity market. The irony was, in the morning, the company's stock made an unimpressive debut on the stock exchanges. It was listed at Rs 115 per share, below its issue price of Rs 120. It went down to Rs 110 before it recovered to end the day 7 per cent lower at Rs 111.20 per share. The TBZ issue was subscribed at the lower end of its issue price band of Rs 120-126 per share.

TBZ is not the first such case. In the past 15 months, till 31 March 2012, of the 42 companies that listed on the stock exchange, the return on average was a mere 4.3 per cent at the time of listing. Of the 42 companies, 40 per cent did not reward investors, with 12 companies getting listed below the issue price and five listing on a par. While 25 companies listed above the issue price, 10 of them gave under 5 per cent returns.

Though everyone loves to blame the bleak secondary market, the truth is that investors too have become greedy for first-day gains. It's also true that investment bankers, unlike in 2005 and 2006, are not keeping any gains for investors on the table. In 2005-06, when the IPO market took off, bankers kept at least 15-20 per cent listing gains on the table for investors. This led to renewed interest among retail investors.

An investment banker, on condition of anonymity, said: "Though illegal, every issue has a market maker or an operator. In fact, everything is planned even before the issue hits the market, who the operator will be and his commission. This has become essential to ensure the IPO's success." Then why do some issues flop? Everyone sells on the day of listing and in most cases it is the operator who absorbs supplies and maintains the price, but when he realises there isn't any interest and his losses are mounting, he gives up, thus leading to a crash in prices. Says a banker, "It's not that operators make money on every IPO; they too lose, on average, if they succeed in 4 to 5 out of 10 issues they make money."

The other reason has been the rising cost of capital. In the past three years, companies have not been able to raise money and private equity (PE) money has also become more impatient. The only alternative for companies, especially mid and small ones, is to tap the primary market. PEs have forced companies to come to the market so that they can exit. Says an investment banker, "Despite the disadvantage, companies come to the market as they aren't able to raise money. It is so bad that today if a company wants to raise Rs 100 crore, after cutting out expenses, operator and investment banker costs, they are left with around Rs 30-40 crore in hand, unlike earlier where they used to get Rs 80-85 crore."

This is why companies have disappointed even after a year of listing. The reason cited by bankers is the low money in the hands of the company to invest in business. When you get Rs 30-40 crore of a total Rs 100 crore to invest in business, how one can you expect the company to deliver Rs 20 crore in growth, which is 50-75 per cent. It will only deliver normal growth of 15-20 per cent. But this growth is not good enough in the overall scheme of things and, therefore, the stock takes a bashing in the market.

The success of the IPO market depends on how well the secondary market performs and, right now, with the latter faring badly, the primary market is expected to remain subdued in the foreseeable future.

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(This story was published in Businessworld Issue Dated 28-05-2012)