the great indiian ipo disaster

What is one of the functions of financial markets? To help growing companies raise capital efficiently. However, that hardly seems to be happening as far as IPOs are concerned the world over. Indeed, going by statistics, the IPO market seems to be in a state of crisis. This is despite the fact that there appears to be no dearth of public issues waiting to hit the market. Fathom this. According to FT, almost US$ 10 bn of IPOs were pulled in Europe in the first half of the year. This has been the worst 6-month period for scrapped IPOs since at least 2005. The situation has been so grim that it has left a sour taste in the mouths of both companies and investors. There have been several reasons for this. For starters, the worsening debt situation in both the US and Europe have dampened investor sentiments in global financial markets. As a result, companies are not too enthused about raising capital. Especially in a scenario where there is so much uncertainty.

There has been considerable lack of investor interest too. Investors have been nursing a lot of grouses against IPOs. They contend that issuers and bankers are too greedy, fees are too high with no transparency, the syndicates of banks brought in to sell an issue are too big, advisers and issuers are in too much of a hurry and more importantly the IPOs are overpriced. Investment bankers, not surprisingly, are bringing out their version of the story. They are of the view that investors' expectations of prices are too low. And that they are not making efforts to assess the management of companies before the latter come out with their IPOs.

That may well be the case. But the argument that IPOs have been overpriced is not without merit. We have seen instances like these in the Indian IPO market as well. Companies and their bankers have come out with issues that have been unrealistically priced. This has been with the hope that optimistic market sentiments will justify the high price that they have been charging. But investors are also becoming a savvy lot in India at least. Earlier, the lure of listing gains resulted in money being poured into overpriced IPOs. But over time, various problems of some of these companies came to the fore, which resulted in share prices coming down. Therefore now, investors are vary of putting their money into IPOs at the drop of a hat and very rightly so! At the end of the day, whether in India or in the world markets, investors have to take into account the quality of the managemen t, the long term growth prospects of the company and the right price before they consider investing their hard earned money into public issues.

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01:26 Chart of the day

When it comes to global asset allocation, the fact that equities and fixed income accounted for a significantly large chunk in Q2 2011 hardly comes as a surprise. But investors also put in money into alternative investments that accounted for around 17% of the total global asset allocation during this period. And as far as these investments are concerned, it is hedge funds that topped the list by a wide margin (almost 60% of the same). Indeed, after suffering quite badly in the financial crisis of '07-'09, hedge funds have once again begun to worm their way into investors' minds. Whether they will be able to give good returns on a consistent basis, however, remains to be seen.