India: Will History Repeat Itself as IPO Market Is Booming?

BOMBAY, 23 February 2004 — The Indian initial public offering (IPO) market is booming. Things have never ever been so good. There are issues coming in not only from the government owned public sector undertakings (PSUs) but also from a whole load of private sector companies. And the best news is that the IPO boom this time is not dominated by IPOs from the Indian software sector alone. It is a mix of both the old as well as the new economy.

To begin, the government is expected to raise over Rs.120.00 billion in the coming months by selling its stake in erstwhile PSUs like IPCL, IBP, CMC, ONGC and Gail India. Infact IPOs of Gail, ONGC, Bank of Maharashtra, IBP and Dredging Corporation are expected to hit the markets before the March 31, 2004. This is also the first time that book building, as a method of share price determination and allotment, is being used for listed companies.

IPCL’s IPO opened for subscription on Feb. 20 and within a few hours of opening, the issue has received bids for 80 per cent of 59.4 million shares available for subscription. Till now investors have put in bids at Rs.170 per share, the floor price fixed for the issue. The issue would remain open till Feb. 27 after which the government would finalize the offer price.

The bid offer from investors for sale of residual government stake in IBP Co. Limited started from Feb. 23. The offer is being made through the book building route, 50 percent of the issue would be allocated on discretionary basis to qualified institutional investors.

Oil and Natural Gas Corporation (ONGC) is soon to follow suit. After the offer, the government’s stake is likely to drop to 74.11 percent from 84.11 percent, while the stake of the general public, now at 3.88 percent, will rise to 13.88 percent.

If all the issues hit the market between January and March this year, the amount will outdo the highest annual amount of Rs.133.12 billion raised in 1994-95.

Issues from BPCL, Haldia Petrochemicals, Mahanagar Gas, Power Finance, and Power Grid and a host of other issues including banks are expected in the later part of the year.

Such a huge deluge of IPOs is expected that Life Insurance Corporation of India (LIC) has a headroom of close to Rs.45.00 billion for investment in the public issues that would hit the market over next five weeks. The corporation is looking at bidding for 2-3 percent of the public issues after considering the discount to market value and liquidity among other factors.

This expected boom in the IPO market is in a way affecting the boom in the secondary market. It was noticed last week on the Indian bourses that profit-taking had gone up substantially. Investors have been booking profit in companies like ONGC, Gail, IPCL, CMC, IBP and Dredging Corporation as they are now expected to reinvest in these same companies through the IPO route.

Of the six issues, ONGC’s offer is tentatively slated to open on March 3. The Gail offer is expected to hit the market on Feb. 27, instead of March 13, as planned earlier. Public offers of CMC and IBP opens on Feb. 23 and ONGC opens on the March 5. Bank of Maharashtra is also coming out with an IPO for its Rs.2.30 billion issue of one hundred million shares of Rs.10 each for cash at a premium of Rs.13 per share. The issue is slated to open on Feb. 25, 2004. Dredging Corporation of India is also expected to open its issue by the end of this month. IPOs are also expected from BPL Mobile, Hutchison, Idea Cellular, Datamatics and Shoppers Stop to name a few.

Investors have seen a boom in the IPO market earlier also. First it was in the mid-1990s and then there was also the tech boom in 2000. Both these bubbles burst badly and investors were the biggest losers.

The loss suffered by them has been so much that even today, they cringe at the mention of an IPO and view every IPO with skepticism.

So there is a fear that this boom too will burst. What is the likelihood of that happening? Well, analysts allay these fears and reassure that they are unfounded. It is unlikely that history will repeat itself this time as the kind of IPOs this time are from sound and established companies.