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IPOs sees erosion of about one-third value of total issue size in 2011

The public offerings of 2011 proved to be bigger wealth destroyers than the overall stock market, with erosion of nearly one-third value of the total issue size of Rs 14,112 crore.

B.S. Srinivasalu Reddy | January 2, 2012 | Updated 11:20 IST

The public offerings of 2011 proved to be bigger wealth destroyers than the overall stock market, with erosion of nearly one-third value of the total issue size of Rs 14,112 crore.

Comparatively, the bellwether BSE Sensex index shed 24.64 per cent during the year owing to domestic factors, Euro zone woes and the economic pangs in the US.

Of the 39 public issues, including two follow-on public offerings (FPOs), only nine companies are trading above their issue prices. The present value of the total public issues during the year worked out to about Rs 9,500 crore, reflecting a loss of over Rs 4,500 crore or nearly 33 per cent for those who invested in these offerings.

"This huge wealth erosion may be attributed to tendencies of high pricing in public issues, accompanied by lower quality. Such a prospect has made investors shy away from the public issues market, leading to shelving of several IPOs, including those of several major public sector companies," said Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities.

The turmoil in the stock market has severely impacted the IPO market, resulting in about 28 companies calling off their public issue plans for the year. The list largely included real estate and power companies, which have tumbled to their 52-week lows in the stock market.

All these 28 companies had valid Securities and Exchange Board of India (Sebi) approvals in hand for their IPOs. Despite that they could not open their issues within the validity period of one year from the date of regulatory approval.

"The probable amount that these 28 companies planned to raise was about Rs 32,200 crore," Thunuguntla added.

Further, there are at least eight other companies, who have valid Sebi approvals in hand and are left with just two months in their validity period. This list includes Pride Hotels and Tara Jewels.

This surely will impact Indian Inc's ability to raise funds to finance their expansion plans, resulting in slowdown in capacity building and job creation for a couple of years.

The Centre's disinvestment program, which was supposed to bring public issues of several blue-chip PSUs couldn't take off. The government has called off the much-anticipated FPOs of ONGC, BHEL and SAIL due to low valuations.

"This has surely impacted the confidence of the public issue market. From the retail investors' point of view, the long-awaited IPO dream remains just a dream during 2011," SMC Global Securities said in a study.

In 2011, large public issues of over Rs 1,000 crore found it difficult to hit the market. Only three of 39 public issues of that size hit the market in the just concluded year, compared to 14 such issues in the previous year. About 17 public issues were small issues with issue sizes below Rs 100 crore, accounting for 64 per cent of the public issues during the year.

There was lukewarm response from the qualified institutional buyers (QIBs) to the IPOs in 2011, with 26 out of 39 issues or two-thirds of the issues not receiving the minimum onetime subscription of the QIB quota. Some of these public issues were literally bailed out by high networth investors (HNIs) and retail investors.

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