'Bidding for issues on hype dangerous'

The lacklustre debut of Reliance Power Ltd. (R-Power) on stock exchanges has acted as an eye-opener for investors who submit bids based on the hype created for big issues in the grey market.

One of the main factors that created a big hype for the R-Power initial public offer (IPO), said experts, was its grey market premium of over Rs 400 on January 18 "� the day the issue closed. R-Power collected a record $180 billion (Rs 710,000 crore) as the issue was subscribed 72 times.

On Monday, the R-Power stock was listed at Rs 430 on the National Stock Exchange (NSE) and closed at Rs 372 or 17 per cent below its issue price of Rs 450.

On the Bombay Stock Exchange (BSE), it opened at Rs 548 (27.4 per cent up the issue price) and closed at Rs 373.95, again approximately 17 per cent down the issue price, the same day.

Investors who borrowed money at high interest rates to apply for the issue badly burnt their fingers as the stock hardly came close to its issue price during the opening day.

"This is a lesson for those who take grey market premiums as the barometer and borrow money to apply for IPOs, anticipating a listing at a certain price," said private investment advisor S P Tulsian.

Tulsian strongly feels that instead of making a decision taking into account the valuations and businesses of a company, investors now-a-days mainly choose to apply if there is a premium on the issue in the grey market.

Analysts believe that most investors chose not to invest in both Emaar and Wockhardt IPOs as they did not attract any premium in the grey market.

According to market participants, the grey market premiums for most of the IPOs are rigged by vested interests, including top stock brokers and also a few investment bankers in some cases, who want IPOs with poor fundamentals to be fully subscribed.

Deven Choksey, managing director, K R Choksey, said that the regulator should take a serious view rather than being a mute spectator.

"Our markets should adopt online bidding system for IPOs akin to some foreign markets. This will make biddings and allotments quicker."

In the online system, shares can be allotted on a first come, first served basis and the issue can close as soon as it gets subscribed.

The regulator should put a cap on the maximum number of shares a person can bid for. This will also help in price discovery as the process will be transparent and can be viewed on the trading screen, said Choksey.