The markets have corrected about 20% from their highs in January. It's not entirely surprising then that initial public offerings (IPOs) priced prior to or in the middle of the correction have bombed. Emaar MGF Land Ltd, for instance, cut its price by 13%, although the Bombay Stock Exchange (BSE) Realty index has fallen more than 18% since Emaar fixed its price band. According to many analysts, Emaar was priced high.
But IPOs have been priced high for some time now, although somehow all parties concerned came out winners (except those who borrowed funds for applying and got a much lower allotment). Otherwise, the company itself raised its targeted amount, pre- IPO investors got firm allotment and saw a marked appreciation in the value of the holdings and IPO allottees also gained when the stock listed at a premium.
Indeed, the Wockhardt Hospitals Ltd and Emaar issues didn't suffer entirely because of high pricing but also the uncertainty of funds locked for about three weeks in a volatile market. A position in the secondary market can at least be liquidated in case of a market crash, but not so with IPO allotments.
The withdrawal of two large IPOs has hopefully woken up investors to the risk involved. The clutch of pre-IPO investors in Wockhardt and Emaar are good examples of bets gone awfully wrong. At least until euphoria resurfaces, bankers and companies may now be reasonable with IPO pricing. When the markets crashed in May 2006, issues such as that of Deccan Aviation Ltd barely made it, and pricing started to get reasonable. The discipline was lost once market sentiment turned euphoric again. But this is the first time large IPOs have been withdrawn and hopefully we are all wiser now.
Source : LiveMint
