When push comes to shove players in Indian capital market generally overreact. It was only about two months ago, when country’s capital market was euphoric about the largest IPO (Initial Public Offering of shares) in the country of Reliance Power. The issue from the Anil Ambani group was floated to raise about Rs 12,000 crore but got application for more than Rs 100,000 crore.

Almost every IPO till then was getting hugely oversubscribed with investors pouring in money with a hope of making a quick gain on the listing of the shares. And, of course, most made money with fabulous returns.

But now, with the stock markets in shambles, investors are avoiding IPOs as plague. Within three weeks after the Reliance Power IPO closed, the market turned bad and the company’s shares got listed at a discount.
As crores of investors suddenly realised that IPOs are no sure shot for making money, losses are more when one invests with borrowed funds, they simply turned around and ran away from IPO market.

Wheel turned

Two major IPOs, Emmar MGF and Wockhardt Hospitals, which opened after the debacle of Reliance Power, were withdrawn after they failed to get the required amount of subscription. After that though a couple of small IPOs managed to get fully subscribed, many have withdrawn their applications and all large IPO plans are now on hold. How did the money-making magic potion turn sour? It is all because of the sharp downturn in stock prices. Between January 10, 2008 and March 14, 2008, the Bombay Stock Exchange’s Sensex has dropped 5,400 points or 25 per cent and investors have collectively lost about Rs 23,54,000 crore of market wealth.

Investors also lost money in majority of the IPOs that had hit the market since January last year (see table). Reliance Power, Future Capital, Purvankara, MindTree are some of the biggest losers. According to a recent study, investors have lost around Rs 3,000 crore or 24 per cent as 13 of the recent 18 IPOs are trading at a discount.

The US flu

The primary reason behind the downturn in Indian market is the subprime crisis that began nine months ago and has now engulfed the entire US financial sector.  The subprime crisis is actually the result of a financial engineering where less credit-worthy borrowers were given generous home loans by banks at a rate of interest higher than the prime rates. But the artificial boom created with easy money went bust as borrowers started de-faulting, property prices crashed leading to further defaults. The total loss to US banking sector due to subprime crisis is now estimated at $400 billion. As consumers are spending less and new jobs being fewer, economists are already predicting a deep recession in USA. Even interest rate cuts and a promise to inject $200 billion worth of liquidity into the system has failed to change the sinking sentiment.    

Impact on India

When the world’s largest economy (US) becomes sick, others start sneezing. All emerging countries like Brazil, Mexico, Russia, China are affected by the US recession and India is no exception. Even stronger economies like Hong Kong, Taiwan, South Korea and Japan are feeling the heat as stock prices all over the world has tumbled.
In India the stock market went on a tail spin since mid January 2007 and Sensex has lost 5,400 points so far.
One of the major reasons behind the crash is that the foreign institutional investors (FIIs) are pulling out of the Indian market after losing money in US subprime debacle.

FIIs, for example, are net sellers to the tune of Rs 2,153 crore in the last 9 trading sessions in March 2008. Slowdown in industrial production in the country also added to the bearish sentiment in the market. 

Annoying implication

The death of IPO market is an worrying news for the Indian economy. To understand how much Indian corporates depend on IPOs for funds let us look at the IPO collection figures in the last five years. Corporates collected Rs 22,131 crore in 2003-04, Rs 25,526 crore in 2004-05, Rs 23,676 crore in 2005-06, Rs 24,993 in 2006-07 and a whopping Rs 51,408 crore in 2007-08 (till the end of January 2008). In the next financial year, according to earlier estimates, corporates were preparing to raise close to Rs 75,000 crore through IPO.

If the present bearish phase continues, we will see very few IPOs. Naturally, those who were to use IPO money for new projects, expansion and working capital will either postpone their plans or borrow from banks to fulfill commitments. Since bank loans are more expensive and come with end-use conditions, project cost will go up. Many infrastructure projects in the field of power, roads housing complexes may suffer for the want of money and this in turn may hamper industrial development in general.

A slump in stock prices will also considerably contract the purchasing power of such consumers who invested in shares for gain. Slackening property prices in Mumbai and Delhi is a good example and it is no wonder that the realty sector is the worst affected in the present market meltdown.

Uncertain future

When will the investment climate improve to bring back IPOs in the market? No one knows for sure. IF US economy goes into a deep and prolonged recession, which now is a distinct possibility, share markets everywhere will remain in the doldrums.

Fortunately, Indian economy is strong enough to withstand many adversities. First of all, the economy is on a sound footing even though the GDP growth is projected slightly lower at 8.7 per cent. Inflation at around 5 per cent is not all that high. The country has a huge foreign exchange reserve and large domestic market makes India fairly insulated from export dependency.