The recent IPO of Coal India Ltd.was the largest IPO in the history of primary market of equity shares. The IPO was successful in mobilizing Rs. 15100 crores at an issue price of Rs. 245. The retail investors who were entitled for a 5 percent discount on the IPO got the shares at an offer price of Rs. 232.75 per share. The Coal India IPO was extremely successful and was oversubscribed 15.28 times. However, what was surprising was the response that it received from retail investors. The retail portion got oversubscribed only 2.31 times. Compare this to IPO of Religare Enterprises Ltd. in Nov, 2007. The IPO was over subscribed around 93 times in the retail segment which was amazing considering that Religare Enterprises was not a big name at the time of issue of shares. Even lessor known IPOs like, 'Precision Pipes and Profiles Company Ltd' and 'Kolte Patil ' in 2007 got an overwhelming response from retail investors and were over-subscribed more than 15 times.
Why is it that retail investors have become indifferent towards stock markets and primary markets in general? Have the market fundamentals changed? Why it is that retail investors, who used to participate in any and every IPO in 2007, did not show interest in a quality IPO like Coal India? Let us look at some facts. The BSE Sensex touched crossed 21000 levels on 05-Nov-2010, which was barely 200 points below all time high of 21206 on 10-Jan-2008. In the last own year, India has been able to attract foreign investments of Rs. 130,000 crore in stock market. This was highest ever between two Diwali festivals or two Samvat. The GDP growth is back on track and we may record a growth rate of 8.5 percent this fiscal. Inflation has started showing signs of southward movement. Banks have seen very high credit off take in the last week, forcing banks to borrow money from RBI. In brief all signs of economic growth are robust. In spite of all this, why is it that the retail investors have not come to the market the way they participated in 2007?
The reasons for this are more than one. The investors lost heavily in the market crash of 2008.The losses incurred in mid cap shares were very high and even though markets have come back to the levels of Jan,2008 many stocks are yet to recover. Examples of these stocks are in the realty sector stocks like DLF, Gammon India etc. Even stocks like NTPC have not done well in last two years and currently trading at 52 week low. Some of the major IPOs like NHPC and Reliance Power have given negative returns since the time of issuance of shares in primary market. Around 40% percent of IPOs are trading at lower price than the offer price which hit the market post Jan, 2008.
Just opposite to this is the performance of other asset classes. Gold is touching all time high and so is the silver. Gold has become safe bet against inflation and the long queues seen in Mumbai outside gold retail shops for purchasing gold coins is an example of this. Real estate, though a capital intensive investment, has gone up very fast in the last two years. Interest rates are going up and hence it has made fixed investments like bank deposits very attractive. Getting a risk free return of 8 percent is not a big challenge these days. Retails investors have lost faith in equity market also because of undesirable volatility in the market which is fuelled by speculation. The logic of long term investment also does not sound very convincing to them as returns offered on an index fund in the last three years work out to be almost zero.
In view of all this, the most important question that needs to be answered is how we bring retail investors back to the market, considering the fact the government of India wants to meet its disinvestment target. The SEBI can reserve a bigger share of public offer for retail investors by increasing it from 35 percent to around 50 percent. SEBI has increased the investment limit to Rs. 2 lakhs for retail investors which is praise worthy. However increasing the reservation for retail investors will enhance the sense of participation for retail investors and also give them the feeling that price cannot be manipulated by big players. The discount given to retail investors in disinvestment should also be enhanced to 7.5% from existing 5%. There is no point in highlighting the fact it is the tax payers money which has built the companies which are undergoing process of disinvestment. As a long term measure, the government can also streamline the process of raising of funds through IPO so that only quality companies can approach the market.
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