Can a set of data relating to the primary (new issues) market be interpreted to yield important messages pertaining to the state of the capital market, investors' preference and policy making? The data in question must, of course, be authentic besides being timely. A recent report from Prithvi Haldea of Prime Database, one of India's oldest and authentic purveyors of data relating to the new issue market, lends itself to many interpretations that will be of relevance to policymakers and lay people alike. The Prime's report of March 28 covers the whole of 2010-11.
Total mobilisation under all public issues, at Rs.46, 267 crore, in 2010-11 was almost on a par with 2009-10, but well short of the highest ever Rs.52, 219 crore raised in 2007-08. However, last year mobilisation was the third highest, according to Prime. The figure would have been higher had not some public sector enterprises (PSEs) deferred their planned offerings. The volatility in the secondary market that had become more pronounced in the second half of 2010-11 has been one important factor responsible for the postponement. There were also reports that some PSE issuers deferred their planned issues for the sake of better cash management. Whatever be the reason, the fourth quarter of last year saw a mobilisation of only Rs.4,468 crore.
The important message from the above is that timing — the timeframe for launching the issue — is a critical activity in the public issue process. It can also be the most controversial. PSE issuers, especially the iconic ones, have often persecuted ‘for selling the family silver cheap'.
Politicians when not in power have found fault with any price that the issue fetches, no matter how well it seemed to have been ‘timed'. It is usually a case of wisdom in hindsight, but for PSE managers, a severe indictment which is difficult to counter logically. Over the years, the politicians' apathy towards the disinvestment process has found expression in singling out specific public share issues for causing loss to the exchequer by being ‘undersold'.
Getting the timing and the right price is not just a question of maximising gains by fixing the offer price at the highest level the market can bear. According to experts, there are other equally important criteria for determining the success of a particular public issue — how well did it meet the retail investors' expectations and whether the issuer price remained ‘stable' months after it came to the market. Answers to these two related questions are not easy. Nor has any one found the magic formula to satisfy both the criteria.
Disinvestment
How well does the PSE disinvestment programme measure up?
The issue is important not the least because PSEs and public sector banks dominated last year's public offerings with a total mobilisation of Rs.27,537 crore
Nearly 83 per cent of the amount mobilised was through divestment and the balance was for raising fresh capital. Divestment refers to the sale of shares by the dominant government shareholder, who naturally gets to keep the proceeds. The PSE can issue additional shares in which case it collects the money. Often the second method is resorted to fund an expansion programme or for meeting working capital requirements.
Spreading equity cult
Whatever be the reason, one of the objectives of the PSE disinvestment programme has been to spread the equity cult among small investors. For many of them the divestment programme has provided the first opportunity to own a successful PSE share.
In all the recent PSE share issues, retail investors were offered a discount to the issue price. But in nearly all the cases the price advantage vanished on the eve of the opening date. While the PSE issues floated in the early part of 2010-11 were criticised for not doing enough for the small investors and hence not receiving the expected number of applications. However, the Coal India's mega offer (Rs.15, 199 crore) — the biggest IPO ever — was oversubscribed 15 times and received the largest number of applications (15.96 lakhs applications) for any issue during the year. It is safe to assume that many small investors who applied profited by the fact that post-listing the Coal India issue gave good returns. One, of course, cannot say that for most issues, whether of public or private sectors. In fact, measuring post-issue gains or losses can be a dicey matter depending on what timeframe one is talking about.
According to Prime, however, most issues gave excellent results on listing. If some of them fell below the issue price subsequently, it has more to do with the secondary market volatility than with any inherent weakness of the issues concerned.
Size matters
According to Prime, the average deal size fell to Rs.811 crore from Rs.1,067 crore a year earlier. As many as ten issues were for Rs.1,000 crore and above. There were only six issues of less than Rs.50 crore and no issue below Rs.10 crore. The smallest issue was for Rs.20 crore. The data clearly show that for the smaller companies, the primary issue market, as it exists today, is out of bounds. Over the years, the government has tried without much success to carve out a niche in the existing stock market mechanism or even start a new exchange such as the OTC (Over-the-counter) Exchange of India.
