Recently, a two-wheeler dealership with a few dozen employees was in the news for an initial public offer (IPO) that attracted 400 times the money it sought to raise. This subscription rush highlighted the casino-like appeal of IPOs that seems to have taken retail investors in its thrall.
Now, a study by the Securities and Exchange Board of India (Sebi) suggests that Indian investors have a large number of gamblers in their midst.
The market regulator’s analysis of 144 IPOs (with their stocks listed between April 2021 and December 2023) shows that a staggering 54% of the share allotments by value to non-anchor subscribers were sold within a week of listing, while 70% were offloaded within a year.
Among individual investors, this tendency was pronounced for shares that gained in value after making their debut. For stocks that rose more than 20%, they encashed 67.6% of their allotments by value within a week.
Investors have been chasing quick returns, which are now being taken for granted, clearly, no matter how good or bad the debut-making company’s earning prospects may be.
Indeed, share prices seem driven more by large lumps of money going into them than anything these businesses are achieving for sustainable shareholder value. Three-fourths of the IPOs analyzed by Sebi saw a post-debut bump-up, while nearly a fifth saw a listing-day rise of over 50%.
This looks like a throwback to pre-Sebi days, when issue prices were set by the Controller of Capital Issues. Back then, even prized stocks often had to be offered at their face value, with the result that demand far exceeded supply, turning allotment into a lottery.
The lucky few who got primary shares could cash out at a huge profit as soon as their trading began. Although issue pricing was freed and Sebi took charge as part of India’s market reforms more than three decades ago, a similar air has come to prevail, with business basics playing too tiny a role.
While we can take heart from the earnest behaviour of mutual funds, which sold only about 3.3% of their allotted value within a week, the broad scenario is far from ideal.
What an economy needs is a market that fosters efficiency in the allocation of capital, done by blending a wide range of informed views on which companies make better use of it.
If equity prices are not aligned with the real value generated by businesses, as the case mostly is when wild bets dominate bourse activity, then the market cannot assure us optimal use of investor money.
For the market to aid India’s emergence, shares must not be seen as casino chips, but as rights to slices of profits made by businesses that are busy satisfying demand in the markets they address. Reckless investor behaviour poses the risk of a collapse that may put people off investing for life.
Another worry is that of a ‘financialization trap,’ into which we could slip if the interests of financial markets begin to dictate public policy. It’s the expansion of our real economy that must drive asset values, not the other way round.
We must not find that consumption is driven by the ‘wealth effect’ of swollen equity portfolios to such an extent that a market slump could hit private spending and cause a wider slowdown.
Nor should we find our high levels of household debt going bad should assets get re-priced to reflect their intrinsic value. A robust stock market is good for us, but not one that’s inflated by gambler infusions. Let the tail not wag the dog.
