The success of Coal India Limiteds (CIL) IPO has come as a welcome relief,as it shows that retail investors are back to investing in primary markets. However,for this,we must thank the government for fixing the right price for the IPO. The success is only because the issue was priced below the intrinsic value of CIL. The decision was judicious and in favour of retail investors and it was an attempt to bring lost retail participants back into primary markets. These efforts augur well for other PSU offerings in which retail investors can line up for subscribing,since the government has predecided retail participation in IPOs,with some benefit through proper IPO pricing. The only factor to bear in mind is that the markets should remain buoyant,in order to bring about more confidence among retail investors and PSU employees. However,the concerns are not yet over,especially when it comes to IPOs from non-government companies. The memory of Reliance Power cannot be erased from the minds of investors,even though it is said that at the end of the day retail investors tend to forget history. The real grave area is the valuations which merchant bankers give to an IPO. The history of IPOs in the last six months clearly suggests that most of the IPOs were failures though they showed huge gains on the first day of listing,when it is very difficult for the investors to exit. The CIL issue has a very important lesson for market intermediaries if the issues are priced right,then raising money from capital markets is not such a big issue. Thus,investors should look at the valuations of the company before they subscribe to the IPO. They should keep in mind that grading of issues is not of much help and must note that there is no responsibility fixed on merchant bankers to give a fair price to the IPO and no regulation in place to have a safety net for retail investors. The shares offered to the public should also have a long-term view,and this is possible only if the responsibility for correct pricing is fixed on the merchant banker. Remember,R Power sold shares for a project which will come out in 2011 and had there been some regulation,merchant bankers could have given a price which could have been sustained in the market on the basis of a market-driven price mechanism. Another issue which investors should keep in mind is that most of the IPOs are pre-sold to institutional investors and operators who play in a cartel and rig up the price of the listing day through the mechanism of circular trading,which is difficult to trace due to its huge magnitude. So far,it is well recorded that only small fishes are being caught and punished by the exchanges while large ones have gone scot free due to the mechanism used. There have been no cases filed even in situations where it was noticed that the IPOs were rigged to seven times the listing prices and then crashed to just 25% of the listing prices. For retail investors,it is difficult to check which is a genuine IPO and which is a pre-sold one. They should generally go for an IPO which is promoted by a very strong promoter like the government and PSUs are a safe bet. Another reason why retail is shying from the market is lack of depth in B grade shares. Out of Rs 1,50,000-crore volume,only Rs 15,000 crore is on account of delivery and exchanges have laid out a set of rules and regulations for dealing with this category of shares which are non transparent. This is especially true for the shifting of shares to trade-to-trade category. The IPO shares,if not exited on the listing day,could even go into trade-to-trade if there is price rise. There is no guarantee how long it will remain there,and hence,retail investors are inclined to trade more and more in futures and options markets and even exchanges are promoting these ideas as the list of futures has kept on rising. The writer is CMD,CNI Research
