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The 2010 IPO Adversity

The year has a huge IPO cache in the pipeline, but investors need to understand that they have nothing much to offer in terms of gains

If one goes by the documents filed with the Securities and Exchange Board of India (SEBI) and by announced intentions, then there will be at least 72 initial public offerings (IPOs) totalling over Rs 50,000 crore during 2010. This is the lower limit - there could well be more. Broadly, this IPO list can be divided into four categories - public sector, real estate, power and others. There are two types of opinions that have been expressed in investment community about this wave of IPOs. One, that they will be a boost for the stock markets; or two, that they will suck so much money out of the markets that they will be a negative.

However, from an individual investor's perspective, there has rarely been such a vast collection of useless investments offered at once. Here's the reason why these IPOs are such an uninspiring collection. The IPO market, in a manner of speaking, is the basic reason for the existence of the stock market. The IPO market is the gateway between savings and productive business investments. The very reason for the secondary market's existence is to provide the liquidity and the exit route that makes it worthwhile to invest in equity.

However, investors should be aware of the fact that the bulk of the IPOs in 2010 do not fit this purpose. They won't lead to any productive investment. The public sector IPOs are just a filler for the government's revenues. None of them will result in any additional funding for the companies themselves, or for any positive change in their functioning as a result of higher private stake. The promoter needs money to fund other activities so, he's selling off some of his shares while making sure that he won't have to give up even an iota of control.

The next category is that of the real estate developers. These companies, as a class, plan to use equity to retire some of the large mass of debt that they have collected. Much of the debt was used to acquire phenomenally over-priced real estate. In effect, the IPO money has already been misspent. It will result in somewhat lower interest outgo, but not in any new investments. Then we have the power companies. For the individual investor, the big problem about power is the long gestation periods. 

All these, coupled with the take-no-prisoners approach to IPO pricing that has now become customary in Indian IPOs, means that the bulk of 2010's IPOs are basically duds. The aggressive pricing by promoters even makes the flippers' approach of applying for everything and then selling on day one genuinely risky. I hope that there will be some good IPOs in 2010, but from the way things look at the beginning of the year, I would not bet on it.