By Shreevats Jaipuira
India’s largest Initial Public Offering opened for subscription in the middle of January 2008. Reliance Power, a part of the Anil Dhirubhai Ambani Group conglomerate was offering 260 million shares in a price band of Rs. 404-450 or $10.10-11.25, totalling close to $3 billion. Following recent trends in India for IPO’s, potential investors were barraged by an aggressive advertising campaign, more characteristic of a launch of a new brand of soda in the US than an IPO for a power generation company. Phones operated by Reliance Communication, India’s second largest mobile phone service provider switched automatically to a ringtone “Power On, India On”. Even Mumbai’s famous “Dabbawalas”, a complex network of 5000 or so individuals, who pickup and deliver home-cooked meals to offices were recruited to distribute subscription forms.
Backed by a strong sentiment in favour of IPO’s in the Indian market and the Reliance brand name, the advertising strategy certainly seemed to have worked. Investors did not seem to worry that the first unit of electricity from the project was not expected to be generated until financial year 2011. As subscriptions opened at 10 am on the 15th of January, investors of all shapes and sizes flocked to get a share; the IPO was fully subscribed within the first minute of opening. When it closed on the evening of the 18th of January, it has been subscribed by 72 times over.
But the IPO also had another unintended effect. Investors began to liquidate their existing portfolios to grab a piece of this mega-offer. This along with the looming fears of a recession in the US and a global credit crunch triggered a market downturn. With the equity markets going into a freefall, subsequent IPO’s were the casualty. Wockhardt Hospitals, one of the largest private healthcare service providers was the first to suffer. Its IPO worth close to $200 million had to be re-priced and subsequently withdrawn after receiving bids for only 20% of its shares on offer. Another victim was the real estate heavyweight Emaar MGF Land, a joint venture between Dubai-based Emaar Properties of Burj-ul-Arab fame and Indian real estate developer MGF Development. Its $1.75 billion offering, made the record for the largest IPO to have been withdrawn in Indian market.
On the 11th of February, as Anil Ambani, Chairman of Reliance Power rang the opening bell of the BSE to commemorate its trade debut, the benchmark Sensex-30 of the Bombay Stock Exchange lost more than 16% of its value from the 15th of January. An anxious sell-off and not celebration was the order of the day. By the time trading closed on the day, Reliance Power had dropped from its opening price of Rs. 599.90 to well below issue price at Rs. 372.50. The markets have since showed signs of a recovery or at least halted their bear run. The Sensex, which had plummeted to a low of 16,458 on the 11th of February, is at 17,826 (as on February 27). There is still a great degree of optimism over the fundamentals for the economy boosted by a strong domestic demand resulting in a gradual decoupling from the American economy. The government has maintained its growth forecast at 8.7% for the year 2007-2008 and close to 9% for the following year. However, the equity markets, which share a greater correlation with global sentiment due to their dependence on Foreign Institutional Investments, will continue to remain volatile. As the 46% gain (in local currency terms) posted by the Sensex in 2007 seems like a more and more distant past, India’s equity party seems to be over, at least for now.