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Yet Another IPO Boom Passes Away

Once more, the greed of promoters and speculators has killed a booming IPO market. Investors as well as policymakers now have some hard thinking to do

And so yet another IPO boom comes to a sorry end. Some large and prestigious (prestigious being defined as having huge ad budgets) IPOs have failed. Earlier today, another huge and prestigious IPO listed and oscillated violently between a discount and a premium to the issue price. This was an issue that was supposedly heading for a huge premium, if the punters were to be believed. And countless promoters are scurrying around slashing their issue prices and/or coming up with ridiculous explanations of how they are having to postpone their IPOs because they have nothing but investors' interest at heart. 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.

It's clear that in the Indian IPO market, there's a business cycle-or more precisely, a greed cycle-at work. It starts with promoters selling fresh equity at fair prices. At this stage, investors generally make reasonable profits, if not at listing then sometime later. As the cycle continues, the issue price bands move higher and higher into overpriced territory and a new type of investor comes in. This investor is looking to sell off his allotment immediately after listing and isn't really bothered by the issue being overpriced. Ditto the guy who's buying from him and so on. Basically, at this point the entire chain from the promoter onwards is looking for the greater fool. Soon, people start to borrow to invest and buy on the grey market and so on because they are so sure that there's an infinite supply of greater fools out there. Sooner or later, the greatest fool is found, the one who cannot find a greater fool. Then the cycle collapses and for a handful of issues, the promoter himself turns out to be the greatest fool, having spent liberally on expensive ad campaigns and other 'image-building' exercises.

In principle, this cycle is similar to that in the secondary markets and indeed in many other kinds of markets as well. At one level, this is a normal behavioural manifestation of the way human beings behave. However the IPO market is not just another market and the greed cycle does more damage here than in many other markets. The IPO market is the gateway between individual savers' money and productive business investments. A healthy IPO market is crucial to fund the equity-financed economic boom domestically. As of today, there's no room for the market for a large public issue even if it is honestly priced. The blame lies at the door of the dishonestly priced and manipulative issues of the recent past. From a situation where investors were willing to pay unfairly high prices we've rapidly swung to a situation where they are probably not willing to pay even unfairly low prices.

There are parts of this problem that can easily be solved by the authorities if they try. The grey market is a major weapon that unscrupulous promoters have and it's one that can easily be stamped out. Grey market operators are so easily found that it defies belief that they couldn't be rounded up if the government tries. They'll always exist but a genuine crackdown could drive them deep underground where they belong. But that alone will not be enough. If the Indian economy has to benefit from equity, some kind of change that discourages the current set of abuses is desperately needed.