Absence of institutional buyers sours IPO market

The aggressive participation of institutional investors in public offerings (POs), which was the highlight of 2010, is missing in the recent public offerings, bringing down the overall mood of the market. Worse, the primary market is not expected to revive at least in the next two quarters. The issues of VMS Industries and Timbor Home, which closed on Thursday, received poor response from qualified institutional buyers (QIBs).

QIB participation in VMS Industries IPO was close to nil. The issue ultimately sailed through with retail investors' subscription of 3.42 times the issue size, and non-institutional investors (NIIs) at 1.11 times. NIIs include corporates and HNIs. HNI subscription was also weak, hardly one-third of total NII subscription.

Timbor Home Ltd, which received 0.65 times subscription from QIBs, was also saved by retail and NII subscriptions of 14.22 times and 3.22 times the issue size, respectively. Another firm, Galaxy Surfactants had to withdraw its IPO a day before its closing on May 19, in the wake of poor response.

"For some POs, the response of QIBs and HNIs has been poor in the recent past. They are shying away from small issues, which are not so well researched," said Prithvi Haldea, chairman and managing director (CMD) of PRIME Database, a premier database on the primary market.

Is this lull in the primary market, where companies raise funds by issue of fresh shares before or after listing, the result of Vaswani Industries, the IPO of which was stalled by the Securities and Exchange Board of India (Sebi)? "If the company knows in advance that there will be poor response to the issue, they will make some arrangements with institutional investors - like Vaswani did. But we cannot paint all the issues with the same brush," said Haldea.

Sebi has ordered cancellation of the Vaswani issue on finding substantial withdrawal of subscription by some of the institutional investors after the issue was closed, by not sending cheques or anomalies in issued cheques.

Jagannadham Thunuguntla, strategist and head of research of SMC Global Securities, said, "Already the mood in the primary market is not upbeat in 2011. Secondary market fall of over 10 per cent could be cited as one of the major reasons."

Hardly 17 POs have hit the market during the first five months of 2011, according to data available with NSE. Of this, only three have given positive returns. Firms have raised over `69,000 crore through the primary market in 2010, which seems to be a tall order this year. Primary market thrives on stable economic conditions and/or in bull markets. High volatility and falling markets are historically anathema for primary market growth.

"Over 50 companies are holding Sebi approvals, but are yet to test the market," said Haldea. Issuers are holding back their plans on fears that if Nifty falls by another 100 points the whole issue plan would get spoilt. To a query on when the primary market could see a revival, Thunuguntla said that the Centre holds the key to the query.

"The revival of primary market depends on the initiatives of the government. Most of the recently-listed firms are trailing their issue prices. The government has to show something on the table for the investors to ensure long-term sustainability of the market," Thunuguntla added. The Centre is also dilly-dallying on launching the follow-on public offerings (FPOs) of SAIL, ONGC and BHEL in a weak market