IPO

Some of the problems for small IPOs have to do with the economics of the capital markets business. First, we have larger players in the institutional investing segment: foreign institutional investors (FIIs), mutual funds and insurance companies. “Investor corpuses have been growing by leaps and bounds,” says Rashesh Shah, chairman and CEO, Edelweiss Capital, a Mumbai-based financial services firm. “Life Insurance Corporation, for instance, collects around Rs 75,000 crore each year, apart from all the other insurance companies.”

All of this capital seeks liquidity in large investments, which implies large-cap stocks. But the most significant number that highlights the shift in the investor structure is the fall of retail investors’ ownership of equity: from 16 per cent of total market cap a few years ago to just 8 per cent. In the US and other developed markets, the number is just under 20 per cent.

Second, small firms are assumed to have dubious reputations, based on historical experience. A number of companies that came to the primary markets in boom years have simply disappeared; the Securities and Exchange Board of India (Sebi), especially under its past two chairmen, S. Damodaran and C.B. Bhave, has made investor protection a holy mission. That raises costs of compliance and due diligence for investment banking firms; a small IPO will not make enough money to cover those costs, or risks.

“The cost of an issue for the company can be 8-12 per cent of the size of the issue,” says the head of another leading investment banking firm. “The smaller the issue, the higher the percentage. It takes a big chunk out of the money raised, and may hurt the company.” In addition, there has been some consolidation in the investment banking businesses, with a few of the smaller ones being bought out by larger firms.






Of the nearly 3,000 companies traded last year, about 179 large-cap stocks, with a market cap of over Rs 5,000 crore each, are widely researched and invested in;







Reliance Petroleum raised Rs 2,172 crore. Earlier that year, in February, a small company tried to raise roughly Rs 13 crore, also through an IPO,   The first avatar of Reliance Petroleum (there was another in 2006) merged with parent Reliance Industries, as did the second one some years later,   Morgan Stanley bought 13 per cent of the company — Infosys Technologies — through the IPO. The rest, as they say, is history. In November 1999, the market capitalisation of Infosys was briefly about Rs 24,500 crore, above Reliance Industries’ Rs 22,400 crore (the equation has changed since, with the market cap of RIL now being almost twice that of Infosys).

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