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Favouring Failure

If a few upcoming IPOs do fail, it would do the whole stock market system a power of good

Back in February 2008, soon after the great bull-run and its accompanying IPO mania had come to a crashing halt, here’s what I wrote in a newspaper column: Basically, everyone knows that hunting season is over and it will be some time before promoters and investment bankers will be able to look for a fresh generation of shikaar. There's nothing new in any of this and in the 15 years or so, since IPOs were liberalised, we've seen this cycle repeat many times. Make no mistake, it will be repeated many times in the future too.

The time for the next repeat of that cycle is definitely here, a little earlier than we would have thought possible at the time. Currently, there are over Rs 30,000 crore of IPOs that are waiting in the wings. This includes some of the high-profile ones that were put off at that time. Emaar-MGF had to pull its Rs 6,500 crore IPO post-opening after having spent a bomb on a massive advertising effort. The last major issue that squeaked through at that time was of course the infamous Reliance Power, but for many investors it became the symbol of an excessively-priced IPO. Currently, that group is also waiting in the wings with the Rs 5,000 crore Reliance Infratel issue.

Based on whatever information is available on these IPOs, I have no doubt that they will be over-priced, or to use the euphemism, ‘fully’ priced. Once upon a time, there was a quaint idea that promoters should price an issue in such a way that in the short-term, investors have a high probability of getting good returns quickly and a low probability of going negative. This was based on the assumption that an IPO is essentially an unknown or a less known quantity and the investor is taking a risk by putting money in an IPO rather than an equivalent secondary market stock.

Promoters and their handlers don’t believe in this any more. They price it to a point where only an intense dose of hype and—apparently—a little behind the scenes help can ensure that an issue sails through. However, this attitude has resulted in IPOs getting the type of investor they deserve. The standard IPO investor nowadays is the flipper, even if he is an institution. He has utterly no interest in the long-term prospects of the underlying business. His sole interest is in selling the stock within days, or even hours after the shares list. Basically, from the promoters onwards, it is the classic punters’ quest for the bigger fool. By all accounts, some of them have already found the bigger fool in the grey market while the issue is still open.

Scanning the news recently, I’m stuck by what a refreshing contrast the Grameen Telecom IPO in Bangladesh is. I know nothing about the details of the business and having an NGO as a co-promoter must make a difference, but the IPO—which is a landmark in that country’s business history—seems designed to share wealth with investors.

This sounds like a perverse thing to write on these pages, but I’m actually hoping that a few of these IPOs fail. Nothing else would knock some sense into the heads of promoters, the issue managers and investors.