Sucheta Dalal :Why everybody loves a booming IPO market
Sucheta Dalal

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Why everybody loves a booming IPO market  

Oct 11, 2004

Screaming headlines, excessive hype and large institutional bids that are neither final offers nor attached to real money. The National Thermal Power Corporation’s (NTPC) oversubscription within minutes has all the signs of a budding mania in Initial Public Offerings (IPOs).

NTPC’s Rs 5,370 crore issue was expected to be oversubscribed. The puff is actually preparing the ground for a host of mediocre or dubious issues to also raise public money. 

The hype also glosses over several inconsistencies. For instance, the fact that Foreign Institutional Investors (FIIs) suddenly don’t seem to care about the tight government control that will be retained over listed Public Sector Companies (PSCs). Unless of course, they had advance notice that the Government would consider making FII and Foreign Direct Investment (FDI) fungible probably opening up a back door to strategic investors.

The media also touts the big issues. Reliance Infocomm is apparently planning an IPO and the Tatas plan on listing other companies in the US.

Clearly, everybody loves a booming primary market. The government sees in it a ratification of its policies. Large corporate houses cash in by raising large and sometimes unnecessary chunks of money. In the early 1990s they pumped the money raised in the primary market into real estate and finance companies, creating an unsustainable bubble. Eventually, both these markets collapsed and hundreds of finance companies vanished. A healthy IPO market also requires a bullish secondary market. Although there is indeed a genuine buzz about India among foreign investors some trading patterns witnessed over the last few weeks ought to be worrying the regulator.

For instance, intraday trading volatility is back with a vengeance. And it again coincides with enhanced FII activity. Foreign investors are pumping in anywhere between Rs 100 to 450 crore per day into Indian stocks on a net basis. However, their daily gross purchases of Rs 700 to Rs 1,000 crore and daily sales of Rs 400 to Rs 600 crore is very perplexing. The last time this happened was in February-April 2004 and it ended up with the panic collapse on May 17.

Worryingly, on any day the FIIs are slightly less active (even if they are net buyers), prices slide. On October 6, the net FII purchases were only Rs 21.8 crore. On that day the Sensex immediately dipped 46 points, suggesting that retail domestic investors are staying away.

Some policy announcements also opened up speculative opportunities. For instance, the Finance Minister’s demand that PSUs must fork out higher dividends and bonuses to the Government pushed up their stock prices as retail investors also rushed in to share these goodies. Consequently, ONGC and other oil companies look good on the markets, when soaring world oil prices combined with administered domestic prices ought to send their investors scurrying for cover.

Similarly, the prospect of big bank mergers, the marriage announcement by Bank of India and Union Bank, and frequent talk about significant acquisitions by IDBI Bank has keep bank stocks buzzing although there are serious questions about their profitability in the coming days.

Interestingly, foreigners are candid about the dangers of India’s volatile markets, which our regulators can neither unravel nor check. The Daily Telegraph of London recently wrote, ‘‘Developing markets are not for the faint-hearted or for those seeking short-term gains. Share prices are volatile. India should only ever be considered as a high-risk investment.’’

It quotes an independent financial advisor, Mitch Hopkinson saying, ‘‘This isn’t the type of market that will just plod along. While spectacular returns are possible over the longer term, expect a roller-coaster ride along the way.’’

This should be a warning to domestic investors too. What it doesn’t say is that some foreign investors and hedge funds, or Indians operating through FII may be responsible for some of this volatility.

For a long time now, this column has argued that regulators and bourses need to put out more information in the public domain because they are clearly unable to detect unusual trading patters and trace them back to possible cartels. Sebi’s Advisory Committee on Derivatives and Market Risk Management whose report has been put out for discussion has made the same argument.

It says, greater disclosures would ‘‘spur the market at large to conduct their own analysis and help detect fraudulent and manipulative practices more efficiently’’. Unusually though, the report details objections and differences among members about greater disclosures, suggesting that its acceptance may be a tough job. The report argues that the private sector ‘‘has access to a different pool of talent’’ and can provide a valuable complement to surveillance carried out by regulators, based on basic information put out in the public domain.

It suggests a public disclosure of the names of top 10 brokers running up the highest trading volumes in each security in the cash and derivative market as well as the names of top 10 brokers in terms of proprietary trading volumes in each security/underlying in the cash and derivative markets. Confidentiality of member positions are to be protected by disseminating the information with a time lag of 7 days.

I do believe that market players can use this data effectively to detect cartels and synchronised trading activity and provide critical market intelligence to regulators. However, the disclosure of information could, for a start, be limited to the around 20 top volume generators in cash and derivatives and proprietary trading.

More information can be gradually released if these disclosures prove useful. Although some members of the committee seem to have argued that public disclosure of top 10 trading positions could negate the core advantage of anonymous order driven systems of making trading cartels difficult, we in India know this is not true.

Investigations into the Ketan Parekh led scam showed that ‘synchronised trading’ between manipulators was large and fairly routine. It also showed that even in a large cartel, there is no incentive for cartel members to break the pact by taking a contrarian view during a secular trend in prices. However, the intra-day volatile in prices observed these days may probably be explained as a consquence of opportunistic trades within cartels. It probably also explains why some members are dead against disclosure of even the top 10 positions ‘‘whatever the time lag’’.

Clearly, it is difficult to accept most arguments against disclosures, and as the market grows more volatile everyday, SEBI needs to act quickly to keep manipulation under check by experimenting with disclosures suggested by the committee in order to make its supervision really effective and accountable, which it is usually not.

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-- Sucheta Dalal