IPOs, Lies and Videotape (Yes, Lies, All Lies!)
IPOs, Lies and Videotape
(Yes, Lies, All Lies!)
Ganga Prasad G. Rao
http://myprofile.cos.com/gangar
Ever so often, the media draws our attention to the zooming stock markets and what the sky-high PE multiples portend for valuation and future course of the market. In developed economies, the stock market is so large and so mature, that practically no IPO, no matter what size, dents the market. The story is very different in emerging economies like China and India where large state-run enterprises, fed with government protection and subsidy, are privatised by offering them in IPOs to the stock market. The relative size of these IPOs in relation to the market capitalization, though small, is significant enough to induce market volatility as investors pull out of their existing holdings to subscribe.
In developed nations, these decisions are unnecessary, even illegal. Entrepreneurs take their enterprise to the market at a time they judge convenient or optimal. That brings to the fore many questions: What the IPO size should be (ie, which enterprise to offer and what percent of the stockholding), when it should be offered; whether it should be graded and what the price band should be. And even presuming the market regulator works independently of the ruling party in the center (yup, have a good laugh!), in what order should the regulator permit these IPOs to open in the market? At any given time, there are 50-odd companies that have filed their prospectus with the regulator. Are these issues timed according to quality? Quality as certified by the grading authority, a certification that is presently entirely optional, giving rise to the signaling and lemons problem economists talk about. (If my IPO is truly a good prospect, why would I have it certified? Then again, I could signal to investors by having it certified. And to the contrary, certification may enhance my image if my prospects aren't that good. After all, I can arrange four quarters of PAT rising at 40% from a quarter with loss!) Do the regulators yield with regard to the timing if the pricing is closer to the government's wishes? (After all, large listing gains are beneficial to FIIs and the stupid small investor who is also a voter!) Wouldn't it be more transparent and informative, if these entrepreneurs competed with each other to bid for IPO slots?
Now that's an idea worth exploring. Entrepreneurs who realize that timing is as much a decision variable as pricing and certification will bid different amounts for their IPO slot depending on the condition of the market, their prospects, their needs and the (perceived) number of competitors. The bidding will ensure that those firms that wish to 'strike the iron when it is hot', perhaps for want of funds to expand, (or reasons not that abstruse) will bid high for a slot. High-priced IPOs will seek the market when the PE is inflated. Bargain IPOs will be deferred to tepid markets. The market PE may not zoom higher than do the realty stocks on BSE. The ruling party, FIIs and IPO funds may no longer be able to play hokey with your fortunes at the market. And that would do the long term investor a lot of good.
Then again, don't read much in to this column. It may have already been 'purchased' away! These days, even lies command a price!!!!!
(Yes, Lies, All Lies!)
Ganga Prasad G. Rao
http://myprofile.cos.com/gangar
Ever so often, the media draws our attention to the zooming stock markets and what the sky-high PE multiples portend for valuation and future course of the market. In developed economies, the stock market is so large and so mature, that practically no IPO, no matter what size, dents the market. The story is very different in emerging economies like China and India where large state-run enterprises, fed with government protection and subsidy, are privatised by offering them in IPOs to the stock market. The relative size of these IPOs in relation to the market capitalization, though small, is significant enough to induce market volatility as investors pull out of their existing holdings to subscribe.
In developed nations, these decisions are unnecessary, even illegal. Entrepreneurs take their enterprise to the market at a time they judge convenient or optimal. That brings to the fore many questions: What the IPO size should be (ie, which enterprise to offer and what percent of the stockholding), when it should be offered; whether it should be graded and what the price band should be. And even presuming the market regulator works independently of the ruling party in the center (yup, have a good laugh!), in what order should the regulator permit these IPOs to open in the market? At any given time, there are 50-odd companies that have filed their prospectus with the regulator. Are these issues timed according to quality? Quality as certified by the grading authority, a certification that is presently entirely optional, giving rise to the signaling and lemons problem economists talk about. (If my IPO is truly a good prospect, why would I have it certified? Then again, I could signal to investors by having it certified. And to the contrary, certification may enhance my image if my prospects aren't that good. After all, I can arrange four quarters of PAT rising at 40% from a quarter with loss!) Do the regulators yield with regard to the timing if the pricing is closer to the government's wishes? (After all, large listing gains are beneficial to FIIs and the stupid small investor who is also a voter!) Wouldn't it be more transparent and informative, if these entrepreneurs competed with each other to bid for IPO slots?
Now that's an idea worth exploring. Entrepreneurs who realize that timing is as much a decision variable as pricing and certification will bid different amounts for their IPO slot depending on the condition of the market, their prospects, their needs and the (perceived) number of competitors. The bidding will ensure that those firms that wish to 'strike the iron when it is hot', perhaps for want of funds to expand, (or reasons not that abstruse) will bid high for a slot. High-priced IPOs will seek the market when the PE is inflated. Bargain IPOs will be deferred to tepid markets. The market PE may not zoom higher than do the realty stocks on BSE. The ruling party, FIIs and IPO funds may no longer be able to play hokey with your fortunes at the market. And that would do the long term investor a lot of good.
Then again, don't read much in to this column. It may have already been 'purchased' away! These days, even lies command a price!!!!!
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