The PSU IPOs

BEATING THE STREET

Over the next six months, there is likely to be a spate of PSU IPOs. These will, one way or another, redefine the shape of the primary market.

If the issues go through succcessfully, the government raises money which will help reduce the fiscal deficit. If the issues fail, it will be an embarrassment that compels a re-examination of the current IPO parameters.

The timing seems propitious. The ongoing secondary market bull run has created a feelgood factor and even wary investors might be tempted to stake some of their profits in the primary market. Certainly Maruti has been a huge succcess.

The primary markets have been dead since the mid-1990s when a series of scamsters killed off investor interest. But enough time may have elapsed for the worst of those memories to have lost their edge.

The government is well-aware that the upcoming IPOs are absolutely vital to the disinvestment programme and, by extension to fiscal deficit control and even electoral prospects.

After years of dithering, it is prepared to sweeten the deal for all subscribers by offering innovative structures and discounts to going prices.

It is also wooing retail investors and trying to bring them into the picture with a combination of larger reservations for retail investors and the offer of greater retail discounts compared to discounts on the institutional side.

This is a welcome change in mindset though it's prompted entirely by practical and even cynical considerations; the FIs lack the muscle to absorb the new equity on their own. It also wouldn't hurt electoral prospects if a lot of small investors made windfall profits.

But the factor of discounts could lead to peculiar technical problems and even a potential marketwide Catch-22 in certain scenarios.

When it comes to the energy PSUs like Gail and ONGC, the flood of new shares at discounts to current price will adversely affect the interests of existing shareholders.

We've seen a burst of selling on rumours that the IPOs would probably be at discounts. The terms of the IPCL deal now makes this almost certain.

The maths is quite simple and leads to clearly bearish trading logic. Most of the PSUs under consideration for IPOs in calendar 2004 have small or zero floats. It doesn't matter in the case of zero floats.

But where there are extant listings, every IPO releases far more shares than are currently available for trading. The new shares would be issued at discounts to current price.

The weighted average secondary market prices post-issue would obviously be lower than current secondary prices. Subscribers to the IPOs will gain.

But existing shareholders stand to lose. Hence existing shareholders should sell current holdings in order to stop losses. They can then buyback post listing.

Since several of the listed PSUs are big index-movers, such selling will mean continuous pressure on indices. Pressure on the indices could create a spread in the bearish sentiment.

This could lead to the aforementioned Catch 22. If the government issues at premiums, the IPOs fail.

If it issues at discounts, the secondary market drops! Let's hope the feel-good factor is buoyant enough to stop this from playing out.