IPO and Retail Investors-B.V.Raghunandan

National Level Seminar on‘Contemporary Issues in Financial Services”

Government First Grade College, BettampadySeptember 19,2014

IPOs and Economy

• IPOs tap household savings• It gives width and depth to the stock market• Massive projects can be financed through IPOs which tap the

richest source of investors i.e retail investors• Provides contrarian views to achieve stability in the stock

market• Moves the market towards perfection as a group of people can

not influence the momentum in the market

IPOs in India

• Pre-SEBI Era (the Era of Controller of Capital Issues)• Post-SEBI Era

Pre-SEBI Era

• Controller of Capital Issues was the regulator• Took a long time in getting the approval• Very conservative way of determining the share premium• The applicants getting the allotment were sure to get

capital appreciation• Dhirubhai Ambani and Venugopal Dhoot of Videocon

believed in primary market and stock market

SEBI Era• Brought in freedom through

free pricing of the issue leading to hefty premium

• Reduced the time for application and allotment

• Ensured fair allotment of shares by fixing the responsibility on the merchant bankers

• Redefined the functions and duties of various intermediaries

• Using the IT platforms of stock exchanges, enabled book-building

• Compliance officer for each issue and investor grievance redressal

• Introduced the concept of discount to the retail investors

Free Pricing• In order to give freedom

to the issuing company, SEBI allowed free pricing the IPO

• A company can charge a premium which it sees fit like a soap manufacturing company choosing its own price

• This was a severe lapse on the part of SEBI

• Unscrupulous companies charged hefty premium not justifiable on the financials of the company

A Few Instances

• DLF’s IPO in 2007 at Rs.525 (FV Rs.2 per share)

• Reliance Power made an IPO in January 2008 allotting the shares at RS.450 (Rs.10 per share)

• Money collected was massive creating a crisis in the money market through the drain of liquidity

• SKS Microfinance made an IPO in 2010 at Rs.935 to retail investors (Rs.10 per share)

• 80 % of IPOs made in 2008 and 2009 are trading below the offer price even now

Duration of IPOs

• It used to be open for five days

• Book-building reduced it to three days

• Offer for Sale has reduced it to one day

Access to Subscription• In firm offers, many

sources to issue applications

• There were also many bankers accepting the application forms

• Now book-building reduced this to members of the Syndicate

• In offer for sale, it requires to be a client of a single agency like StockHolding Corporation of India

Indian companies mopped-up Rs 1,619 cr in 2013 through IPO, the lowest level in 12 yrs. Reuters

Too Much Sophistication

• Usage of IT scares away many investors making the markets to be dominated by institutional investors leading to lack of stability

• Unlike in the stock market, keeping the subscription open for a few more days may not affect the development of the market

• Physical format should also be kept as a choice

Reforms of IPO market• Stop free pricing and

connect it to book value of the share

• No compulsory demat account for Book-Building

• Book-Building and Firm Price offer side by side with the cut off price applicable to the firm offer

• Issue of IPO cards to the investors to be used for subscribing to the IPO

• Longer duration for subscription

• Introducing a physical segment of trading in stock exchanges

THANK YOU