Small-, mid-caps see sell-off ahead of IPOs

In an effort to accumulate cash for the two big upcoming IPOs - Future Capital Holdings (FCH) and Reliance Power - next week, investors sold small and mid-cap stocks heavily to trigger a sharp slide in the Bombay Stock Exchange's (BSE) respective indices on Tuesday.

BSE's small-cap index fell 3.28 per cent, the biggest among all the indices, while the mid-cap index shed 2.82 per cent in an otherwise flat market. Sensex, the 30-share benchmark index, was up 0.29 per cent after piercing the psychological 21,000-mark in early trades.

Investors, who sold the stocks on Tuesday, would get the money in their accounts by Friday, said dealers. FCH, led by retail pioneer Kishore Biyani, will be the first company to hit the capital markets this year with its initial public offer (IPO) opening on January 11. The company expects to collect up to Rs 490 crore, for which it has fixed a price band of Rs 700-765 a share.

FCH will be followed by Reliance Power's IPO, the country's biggest, which would hit the market on January 15. The offer is estimated to raise over Rs 12,000 crore. RPL has fixed a price band of Rs 405-450 per share.

Most of the traders choose to book profits in small and mid-cap stocks, which have witnessed a run away rally in the past couple of months, to subscribe for maximum number of FCH and RPL shares, said brokers.

The mid-cap index has outperformed the market in the one-month period leading up to 7 January 2008, adding 11.97 per cent as against the Sensex's 4.24 per cent rise.

It has also outperformed the market in the past three months, soaring 36.54 per cent as against the Sensex's 13.85 per cent.

The small-cap index also outperformed the market in the month up to 7 January 2008, adding 23.21 per cent. It has also outperformed the market in the past three months, soaring 55.68 per cent.

"It is true that some of the market participants were booking profits to accumulate cash for the two mega IPOs lined up next week," said Deven Choksey, managing director, K R Choksey Shares and Securities.

Added Kashmira Mehta, dealer, C D Equisearch, "The stocks of most companies listed on the bourses in 2007 have more than doubled within a few weeks of listing. So investors have chosen to book profits to invest in the coming IPOs."

While applying for big IPOs, not many high net worth individuals or traders prefer to using borrowed money as the rate of interest is 15 per cent and above. If the IPO does not list at a significant premium, the move, invariably, results in huge losses.