IPOs turn quality conscious

THE GREAT IPO BAZAAR PART II

What makes the forthcoming stream of initial public offers (IPOs) particularly strong is the Q factor: the quality of the average offer coming up is much better than in the past.

Part of the reason for the improved quality is regulatory pressure. The Securities and Exchange Board of India (Sebi) has mandated a wide array of disclosures in the prospectus for public offers.

Vivek Seth, country head (capital market), Birla Global Finance, says: "Sebi's new disclosure norms have helped investors to judge an issue better. Moreover, investors applying through margin finance get an additional consulting window or an independent agency to advise on the offer. Thus the response to quality is excellent."

The other reason is that investment bankers do not want the euphoria to lead to another round of disappointment. Hence the stress on quality.

Ajay Sondhi, vice-chairman and managing director of Kotak Mahindra Capital, said, "The quality of the issues hitting the market now is far superior than during the earlier boom periods."

The companies were well known as well as profit making, he pointed out. "It started with the Divi's Labs public offer," he added.

During the stock market boom in the 1990s, a lot of obscure companies hit the market. Anyone and everyone who had something to offer wanted to raise money.

Not surprisingly, some of them dropped out of the radar after a couple of years and shareholders were left holding dud certificates.

A Murugappan, joint head (investment banking and M&A advisory) at ICICI Securities, said companies were now coming to the market after having established their presence in their respective sectors.

"Investors already know about them," he said. Divi's Labs, Maruti Udyog, Vijaya Bank, Canara Bank, UCO Bank and Indraprastha Gas are among the prominent issues that hit the market recently.

In 2000, when the technology optimism led to an IPO boom in the sector, again a number of unknown companies appeared.

The excesses of the past have made both the regulator and the market intermediaries more cautious this time.

Not only are disclosures better, investment bankers are doubly cautious about the pricing. Thus, gone are the days when the idea was to get as much price from the market as possible. Now, investment bankers are advising issuers to be conservative about their pricing estimates.

According to Prithvi Haldea of Prima Database, a notable feature of the public issues this year is there is a "deliberate under-pricing, leading not only to healthy oversubscriptions but also a handsome post-listing gain to investors".

He pointed out that there were lessons to be learnt in this.

"Under existing conditions, what is going to be successful is the ideal combination an investor wants, a sound company with a reasonable price," he added.

Retail investors are biting the bait. Rajendar Naik, managing director, Centrum Finance, said, "In the last few months, retail participation has been buoyant depending on the quality of the issue."

He noted that retail participation from interior towns of Maharashtra, Gujarat, Punjab and Andhra Pradesh was growing.

"When yields are as high as 60-70 per cent (between application and listing), beating returns from fixed income instruments, with limited or no downside risk, even investors from small towns are drawn in," he said.

An investment banker, who did not want to be identified, pointed out: "It is not that investors are buying blindly. With all issues going through the book-building route, people are more aware of the expected cut-off price. That is, each investor is calculating how others will react to the issue. The quality and awareness of investors, too, has improved," he said.

In fact, quality issues in the recent past have been oversubscribed 15-35 times. On the whole, the average retail subscription in the current financial year was around 10-15 times of the issue, industry sources said.

Kotak Securities Managing Director Narayan S A said, "You will see the madness for 2-3 years." Unlike in the past when retail investors were left to fend for themselves, this time around investors are being told to stick to lower prices in order to have better chances of allottment.