Recounting the history of the Indian primary market over the last 20 years is like watching a movie backwards from its climax.
Precisely 20 years ago, the primary market was booming like never before. Issuers were eager to tap markets and retail investors even more anxious to give them the money. The regulator had its job cut out trying to prevent investors from taking on too much risk.
The following facts better explain the stark contrast between then and now. The number of offers hitting the market in 1993-94 numbered a breathtaking 1,700. In the last one year, barely 60 offers made it to the market. In 1993-94, retail investors were so keen to secure allotments in initial public offers (IPOs) that they stood in queues for the application forms and paid huge grey market premiums. Today, public sector companies have to offer big discounts to get retail investors to buy shares, even though they can invest at the click of a mouse.
The instruments through which companies solicited money 20 years ago were more sophisticated too. Just half of the IPO money raised in 1993-94 for instance, came in through plain-vanilla shares. The rest came in via fancy instruments such as convertible debentures and warrants. Who can forget Reliance Petroleum’s TOFCD — triple option fully convertible debenture issue — lapped up by two million investors in 1993?
Fewer, but better
But what primary markets have lost in terms of glamour and dazzle over these 20 years, they have certainly gained in quality and maturity. Today, greenhorn promoters can no longer breezily tap public money to fund forays into new ventures ranging from dairy farming to equipment leasing. Nor can issuers price their offers at stratospheric multiples counting on naiveté of investors. As to playing favourites with share allotments, manipulating listing prices or quietly lining the family coffers with public money, this has become close to impossible.
Iron hand to free market
A good amount of the credit for this comprehensive clean-up of primary markets goes to the Securities and Exchange Board of India (SEBI). After coming into being in 1992, SEBI has proved its mettle by gradually bringing various market entities under its jurisdiction and ushering in scores of changes in IPO rules. At the time SEBI came into being, the primary markets were in a state of near-anarchy caused by the disbanding of the Controller of Capital Issues (CCI). The CCI had ruled the primary markets with an iron hand, requiring any issuer who wanted to price his shares above ‘par’, to justify it through a complicated formula and reserve minimum allotments to retail investors.
The CCI’s exit was thus greeted by a deluge of issuers who took advantage of ‘free market pricing’ to flood the markets with offers for all manner of ambitious ventures. The three years from 1993 to 1996 saw over 4,500 new companies tap markets. When the frenzy was at its peak, it was not unusual to have 35-40 IPOs each week, a third of them from finance companies. Malpractices such as overstating profits in the prospectus, discretionary allotment of shares, and siphoning off money rampantly flourished. Yet, fabulous first-day returns on every other IPO had droves of retail investors applying to the new issues.
The clean-up begins
SEBI, however, began to get its act together quickly. In 1993-94, it changed new issue rules to make proportionate allotment compulsory, asked promoters to bring in a minimum contribution of 20 per cent, and began to register market intermediaries such as merchant bankers and underwriters to bring them within its ambit. These did not make a big difference to the number or issuers hitting the markets.
Then, based on suggestions by the Y. H. Malegam committee, new disclosures were mandated. These made the prospectus bulkier, but vastly more revealing. It was then that elaborate risk factors, management discussion of financials, and the progress report on the project made their entry into the offer document. But the change that really raised the bar on new issuers came in 1995, when SEBI specified a three-year profit track record for companies wanting to go public. Companies that met the norms could launch fixed price offers, but the rest were encouraged to take the book-building route. By reserving a large portion of these book-built offers for institutional investors, it was hoped that pricing for new issues would be kept under check.
Wooing retail
But if the regulator’s biggest headache in its initial years was to keep retail investors away from riskier offers, the situation turned topsy-turvy from 2008. For, what looked like a tentative revival in fund-raising in 2006 and 2007 quickly died with the stock market crash — in fact, just after another Reliance entity— Reliance Power garnered record subscriptions in January 2008.
SEBI’s efforts thereafter have centred around getting retail investors to put faith in the primary markets, in lieu of mattresses, deposits, gold and real estate. First, investing in IPOs has been made vastly simpler through online investing and electronic refunds. Institutional investors have been made more accountable with full upfront payments, transparent bids and the anchor investor concept.
In the last two years, after unearthing many more cases of price and prospectus manipulation in the 2011 IPOs, SEBI has tightened accountability for merchant bankers and issuers. Its latest move is a decision to put each IPO document under the microscope through its own team. This is expected to nip at the bud practices such as padding up of profits, mis-statements and underplayed risk factors.
At the end of it all, even fewer issuers may make it to the markets from here on. But the good news is those that do, may deliver much better returns to their investors than ever before.
That is already evident with 2012 IPOs delivering good returns to their investors.