BSE speeds up its IPO plans

The country's leading bourse Bombay Stock Exchange (BSE), is speeding up its initial public offer plans. Asia's iconic exchange believes that it is not about money but more about providing liquidity to its investors.
The trading of shares will start once BSE gets listed on its own platform.
NDTV has learnt that the guidelines for a listing would come out in 4-5 months from SEBI, and BSE is upbeat about it.
“There are certain models by global players; we are working in tandem with SEBI for guidelines,” said Rajnikant Patel, MD & CEO, BSE.
This listing can prove to be unique in many ways as BSE will list without offering any new shares to retail investors through an IPO. It is sitting on enough cash reserves to fund its capex needs.
“Our listing plan is to provide liquidity to investors. We have enough cash reserves,” said Patel.
The Bombay Stock Exchange on Friday launched trading of Sensitive Index-based Futures on the US Futures Exchange (USFE) in Chicago.

"The IPO process might be completed very soon if everything goes smoothly”, Patel said.

Sita Shree lists at Rs30 on BSE

Wheat and pulses processor Sita Shree Food Products on Monday listed at Rs30 on the Bombay Stock Exchange.

The scrip opened at Rs30, which was also its issue price, and touched an intra-day high of Rs43.40 within the first few minutes of trade on the BSE.

On the National Stock Exchange, the scrip opened at Rs35 at a premium of Rs5 over its issue price, and touched an intra-day high of Rs43.40 in the early morning trade.

The company listed 2,20,36,800 shares of the bourses.

The scrip later parted with some gains and was trading at Rs41 on the BSE and Rs40.65 on the NSE at 1005 hrs. Over 1.06 crore shares changed hands on both the bourses.

Sita Shree had raised about Rs31 crore through the initial public offer. The company, which supplies its products to major retail industry players such as Pantaloon retail and Reliance retail, proposes to utilise the issue proceeds to part finance its Rs48.12 crore expansion plan.

Sita Shree’s product portfolio comprises wheat flour, maida, rawa, daliya, suji and chana dal amongst others and these are marketed under its own brand like Sita Shree regular and Sita Shree gold

BPCL-Oman Oil JV files DRHP with SEBI

Bharat Petroleum Corporation Ltd. (BPCL) said on Friday that Bharat Oman Refineries Ltd. (BORL), a Joint Venture between BPCL and Oman Oil Co. Ltd. has filed a Draft Red Herring Prospectus (DRHP) with capital market regulator SEBI today.

Bharat Oman Refineries plans to sell a total of about 48% through the public offer and a pre-IPO placement to raise up to Rs25bn, according to reports. Bharat Oman Refineries could sell a stake of more than 20% in a pre-IPO placement to financial investors, the report added.

Bharat Oman Refineries is building a 120,000 barrels per day (bpd) refinery at Bina in Madhya Pradesh at a cost of Rs104bn. It has secured term loans of Rs64bn. The refinery is expected to be commissioned by the end of 2009.

BPCL runs a 240,000 bpd refinery in Mumbai and another 150,000 bpd refinery in Kochi in Kerala. Its subsidiary Numaligarh Refinery Ltd. runs a 60,000 bpd refinery in the north east.

SBI Capital Markets, Citibank and ICICI Securities are among the lead managers to the Bharat Oman Refineries issue.

Kiri Dyes IPO swims against the tide

Kiri Dyes and Chemicals Ltd is coming out with its initial public offer (IPO) when most of the other companies have put on hold their IPO plans. This Rs 200 crore dyes and chemicals company had planned to come out initially with an IPO at a price of Rs 250 per share a few months back when the Indian capital markets were at all-time highs. But, the market crash that took place in early January forced the company to put on hold its IPO plan as big issues like Emaar MGF and Wockhard Hospitals got washed out.

Now, the company is finally venturing out into the market at a much lower price band of Rs 125-150 for a Rs 10 face value share. In spite of the slump in the grey markets, Kiri Dyes IPO is trading at a premium of Rs 14-Rs 15 per share. While the small size of the issue and its attractive valuations will enable the company to get its issue subscribed, at what price it will get listed on the bourses has to be seen.

Rating agency CRISIL has given a poor rating of 2 out of 5 for this IPO which will be open for subscription from March 25 to April 2.

Issue Details:

Kiri Dyes is planning to raise Rs 56.25 crore at the upper price band of Rs 150 to fund the expansion, capex and working capital. Company will issue 37,50,000 equity share of face value Rs 10 each in the price band of Rs 125-150 per share. Post IPO promoter and promoter group holding will come down to 66.57%.

Company has also made a pre-IPO allotment of 12.50 lakh shares raising Rs 14.40 crore. It allotted 11,18,860 shares or around 10% of equity capital to Well Prospering Ltd a subsidiary of Lonsheng Group (Losen) at Rs 115 per share and another 1,31,140 equity shares to SMS Technology Ltd at Rs 120 per share.

Company business: Kiri Dyes is a manufacturer and supplier of reactive dyes and dyes intermediates of various forms. Company also proposes to venture further into backward integration to make sulphuric acid and its derivative. Existing installed capacity includes 10,800 MTPA of dyestuff and 7,200 MTPA combined capacity of intermediates, vinyl sulphone and H acid.

Company's dyestuff plant is located at Vatva in Ahmedabad and intermediates and chemicals plants located at Padra in Vadodara. Company has also ventured in to 60:40 JV with Lonsen- Chinese company to start with production capacity of 20,000 MTPA of reactive dyes which to further increase to 50,000 MTPA later on. Lonsen's dyestuffs production capacity is 2 lakh MTPA higher than entire India's 1.5 lakh MTPA. JV company target production to commence by 1st quarter of FY 2009.

Objects of the issue: Company to spend around Rs 42crore to fund capex for setting up a plant to manufacture sulphuric acid, oleum and chlorosulphonic acid with a combined capacity of 1.8 lakh MTPA enabling backward integration and economies of scale at Vadodara.

Sulekha.com plans IPO next year

Local commerce portal Sulekha.com is preparing to enter the capital market sometime in 2009, the time frame when the company is expecting to clock revenues of $30 million (about Rs 120 crore).

The company which started its operation in 2001, just a year after the infamous dot.com bust, is putting in place a solid business model to entice the small and medium businesses by providing local classified and yellow pages services in any part of India.

Satya Prabhakar, the president and CEO of the company, said the company will soon establish city-specific services across 40 tier-II, III types of cities including Mysore, Coimbatore, Trichy, Chandigarh, Indore, Surat and Vijayawada.

Presently, Sulekha.com offers city-specific services in eight cities in India, apart from 14 cities in the US and one city in Canada.

“This will be financed from the $10 million funding the company had received from Norwest Venture Partners in October 2006. So far the company has gone in for two round of fundings, the first one being $4 million it raised in 2001 from Indigo Monsoon Group.

The online local Internet advertising market in India is estimated to be about Rs 450 crore at present.

The local Internet market has seen a spurt during the last couple of years with the emergence of a host of local portals like asklaila.com, Guruji.com, JustDial and tolmolbol.com among others, with primary aim of harnessing the opportunities in the local advertising market.

Realising the importance of local advertising, even global players like Google and Yahoo are planning to launch city-specific local search services.

However, Prabhakar feels that local commerce is not an easy game to play even if a company is financially stronger. “It is very difficult to exercise. You need to create a nation-wide sales infrastructure; you need to reach the people who use your service,” he remarks.

Sulekha, which drives its revenues primarily from businesses, instead of the end consumers, is working out plans to rope in more channel partners who will drive online traffic to the websites.

The company has already tied up with companies like Vodafone, AirTel, Reliance Communications and Sify to drive the traffic as its channel partners. According to Prabhakar, at any given point of time, the company is talking to about 10-15 companies, to select them as channel partners.

The company which recently launched its assured advertising solution for small business, aims to attract about 50,000 businesses to advertise in the portal by the end of the year.

The company is giving advertisers the guarantee to succeed, and if an advertiser feel that his target of getting a certain number of responses has not been met, Sulekha.com is assuring to run the same advertisement till they met the business demand.

Merrill Lynch acquires 12% in Sharekhan

Baring Private Equity has pipped financial services giant Merrill Lynch to acquire a 12% stake in Mumbai-based Brokerage firm Sharekhan in a deal worth Rs 240 crore.

This deal values the brokerage company at Rs 2,000 crore. The transaction is through a mix of secondary sale by the largest shareholder of the brokerage firm Citigroup Venture Capital (CVC) and additional infusion of funds into the company’s capital.

ET had reported in its edition dated December 24, 2007 that Baring is among the group of investors negotiating to pick a minority stake in Sharekhan. Earlier, Merrill Lynch was believed to be the front-runner to pick this stake. Last year, CVC along with IDFC had invested around Rs 650 crore to pick 85% stake in Sharekhan. This translates into valuation upside of more than 125% in ten months. CVC owns 75% in Sharekhan while IDFC holds 10% and the management and employees hold the remaining 15%.

CVC India country head Ajay Relan confirmed that Sharekhan has inducted new investors in the firm, but declined to comment on valuations. Baring Private Equity India chief Rahul Bhasin could not be reached for comments and an email sent to him did not elicit any response.

Last year, CVC and IDFC together had acquired 37% equity owned by Sharekhan promoter Shripal Morakhia while 48% was acquired from other shareholders including GE, Intel Capital and some funds advised by HSBC PE India. As reported earlier, CVC was believed to be keen on diluting its stake in Sharekhan due to some regulatory issues. CVC, part of banking major Citigroup, had a significant majority stake in the brokerage firm.

A private equity firm holding substantial equity stake in an unlisted company would be classified as a promoter. If that company goes public, the PE firm’s sahres would have a lock-in period and cannot exit for a certain period. This could be one reason why CVC intends to dilute its stake, though it could not be verified independently.

A classification as a promoter also brings other aspects such as disclosure norms into the picture.

According to a source close to the deal, the latest transaction involved additional capital infusion by existing shareholders including IDFC which invested proportionately to maintain its 10% holding in Sharekhan pursuant to Baring investing in the brokerage’s equity capital. However, CVC’s stake has now come down to 63% from 75%. Incidentally, Baring already has an exposure in the sector through JRG Securities. It had picked a 44.8% stake in the Kochi-based brokerage firm for $35 million (Rs 140 crore) about a year ago.

Financial services firms, especially those with brokerage business, have been commanding high valuations in the stock market. While many of them have got corrected substantially by 40-50% in the recent market crash, some of them are still valued in the billion-dollar plus bracket.

Indiabulls Financial, even after spinning off its brokerage business into a separate firm Indiabulls Securities, which is to list soon, is the most valued firm at about $3 billion. It is followed by investment banking-cum-brokerage firm Edelweiss Capital which is valued at $1.25 billion, India Infoline ($1.15 billion) and JM Financial ($1.1 billion).

Sharekhan valued at Rs 2,000 crore is at the same level as that in December 2007. While other listed brokerage outfits have seen their value cut by as much as half in the stock market, Sharekhan, as an unlisted firm, has managed to retain its implicit valuation. Now it is valued ahead of Motilal Oswal which till recently carried a market cap of Rs 4,500 crore.

IPO close and listing gap may be cut to 3-5 days

The proposal, which will be one of the biggest capital market reforms in recent years if it is implemented, has been made by a Group on the Review of Issue Process (GRIP), which is likely to submit a report today or tomorrow.

GRIP is a sub-committee of the stock market regulator’s Primary Market Advisory Committee (PMAC), which meets Monday to consider the report. The report will be put up for public comment by the Securities and Exchange Board of India (Sebi) after that.

The decision to reduce the IPO closure and listing period was announced by the new Sebi Chairman C B Bhave after the regulator's board meeting in New Delhi yesterday.

Sources close to the developments said Sebi was also considering changing the price discovery, bidding and allotment process to eliminate grey market operations and having investor money locked up without interest payments for almost a month.

Since these reforms will require a smoothly functioning electronic market in which everything from applications to payments will be in e-mode, the broad proposal is to introduce the changes in phases.

In the first phase, applications will be allowed in both electronic and physical formats and the time gap between issue closure and listing kept to seven days.

The three-day process could be considered once sufficient experience has been gained on electronic applications.

"Large IPOs attract many first-time investors who are not necessarily skilled and technology-savvy. For these people we still have to provide an alternative mechanism," said the source.

As part of the exercise, the information required in the application form may be pared to the bare minimum like the Permanent Account Number or unique identification number issued by the Association of Mutual Funds of India.

Data like the applicant’s father’s name and address will be scrapped since a good deal of investor data are already available electronically.

The reduction in the time gap between issue closure and listing will address one of Sebi’s major concerns that promoters artificially boost demand in the grey market ahead of an IPO listing.
Promoters typically take advantage of the time gap between closure and listing to put in bids in the grey market through. Many brokers also take independent positions on stocks and charge clients a premium for doing so.

Shortening the time gap will also impact institutional investors who may have to pay the entire amount upfront along with their applications, like retail investors do now, against 10 per cent currently.

IPO grading: Back to basics

IPO Grading is a new concept launched in mid-2007 by CRISIL. While it is unique to India, the underlying philosophy - the need for independent research in equity has been recognised in several other markets.

In the US, for instance, fines raised through the Spitzer settlement early this decade were used to pay for independent equity research. Similarly, Malaysia’s stock exchanges pay for independent research on listed companies.

IPO grading is a tool that provides an independent opinion on companies going public for the first time. There traditionally exists little or no information or research on these unlisted entities for retail investors.

And these investors more often than not, lack the resources to carry out adequate research on their own before investing. In a move aimed at enabling investors obtain an unbiased opinion on fundamentals of IPOs in India, Sebi made IPO Gradings mandatory in May 2007.

The objective was to provide simply-expressed opinions on the issuing companies that lay investors could base their decisions upon. IPO Grading fills this gap, with an easily understood and self-explanatory grade from 1 to 5, available free to the investing public.

This grade indicates how strong the fundamentals (essentially the intrinsic quality of the company as measured by its business prospects, financial strength, corporate governance and management quality) of the graded company are in relation to listed Indian companies.

CRISIL makes IPO grades available free of charge to all investors on its website. The grades are also displayed in the company’s IPO prospectus, advertisements and application forms.

While there is consensus among market participants that an independent opinion by a credible agency does benefit the market, there have been whispers that the value to investors is questionable as an IPO grading does not provide a view on the issue price and it does not directly recommend whether the investors should subscribe to the proposed IPO.

Why does an IPO grading stop at fundamentals? Why can’t it take the next step and actually recommend an investment decision (buy/don’t buy) to investors? For this, let us understand the components of an investment decision. An investment decision stems from three basic components, an analysis of fundamentals, an analysis of returns and investor preferences.

While an analysis of returns (does the upside potential match the investor’s return expectation?) and investor preference (for example, is he/she already overexposed to the specific asset class/sector) are very specific to the individual, the fundamentals of a company are uniform across every class of investors.

Thus, what is a ‘buy’ for a 25-year-old may not be appropriate for a 57-year-old, even as product attributes and quality are constant. An all-encompassing ‘buy’ or ‘don’t buy’ opinion can therefore mislead investors. At the fundamental level, however, there can be no ambiguity: what is fundamentally good or bad is fundamentally good or bad for all categories and classes of investors!

What then should an investor do after seeing the IPO grade? Having satisfied yourself as to the quality of fundamentals through IPO grading, investors should proceed to analyze whether the pricing of the issue is in line with its quality. This can be done by looking at the pricing of other peers in the secondary market. This combination of fundamentals obtained from the IPO grade and the investor’s own analysis of returns should lead to an investment decision by the investor.

A common refrain is, “how come an issue graded 1/5 (weak fundamentals) was subscribed several times over? And on listing, opened at double the price? How did the 4/5 company open so low? Does this mean your grading is wrong?” The answer is a resounding no. The price on listing or the extent of oversubscription or the grey market premium are all a function of various factors including pricing of the IPO and market sentiment. IPO grading is not a tool for investors (speculators?) looking for short-term listing profits and it cannot be judged based on what happens when an IPO lists. IPO grading is a very useful tool for a serious investor looking to make stock picks of fundamentally sound companies from a long term perspective.

Caveat emptor - if you are investing your hard-earned money, you must understand what you are buying. An IPO grading can give you the benefit of an expert opinion on the prospects of the company, quality of management and corporate governance completely free of cost. So, while investing, refer to the IPO grade, factor in your return expectations and preferences and make an empowered, informed and sound investment decision.

New IPO's Gap for listing time to be reduced says SEBI

Capital market regulator SEBI said on Wednesday it has slashed the fees payable by various market players by up to 80%. The regulator will also reduce the gap between opening of an issue and the listing of securities on the bourse and make the registration norms for foreign institutional investors (FIIs) more flexible.

The fee payable by mutual funds, custodians and those who file offer documents has been cut by as much as 80% from April 1, 2008, SEBI chairman CB Bhave told reporters here after a meeting of the regulator’s board. It has also slashed the fee for offer documents for buyback of securities and the registration fee for venture capital funds.

The fee for filing offer documents for a public issue and mutual funds has been lowered from 0.03% of the amount raised to 0.005%. While the cap on fee for a public offer is Rs 3 crore, for mutual fund, it is Rs 50 lakh. The annual registration fee for custodians has been slashed from 0.001% to 0.0005% of assets under custody.

SEBI has reduced the registration fee for venture capital funds from Rs 10 lakh to Rs 5 lakh. The fee for rights issue offer documents has been slashed from 0.05% to 0.005%, subject to a maximum of Rs 5 lakh, Mr Bhave said. The fee for filing an offer document for buyback of securities has been reduced from 0.05% to 0.125%, subject to a maximum of Rs 3 crore.

Mr Bhave said SEBI has set up a panel to examine how to compress the IPO process. “Institutional investors tend to argue that they put in a lot of money that cannot be locked in for such a long time. Secondly, some people have raised the issue of funds that remain with the banks. That issue will also be automatically addressed once we reduce the gap. Although no time frame has been given, the panel will work expeditiously,” said Mr Bhave.

Foreign institutional investors (FII) can look forward to a more liberal registration regime in India. SEBI is making the FII registration norms announced last October more flexible. "We have not notified it so far because we want to make the process more flexible so that more and more FIIs can easily get registered, " SEBI whole time member T C Nair said. SEBI board had on October 25 agreed to certain changes in the registration criterion for foreign investors.

A large number of investors who were investing into India through participatory notes and wanted to register directly have been keenly waiting for the norms to be notified. Mr Nair said about 200 foreign institutional investors have registered to buy shares in India since the regulator tightened rules on investments using offshore derivatives in October.

SEBI's board also decided on Wednesday that a three-member panel headed by National Judicial Academy director Dr Mohan Gopal would oversee regulatory proceedings against the National Securities Depositories Limited. Mr Bhave had requested that he be recused from the proceedings as he was in charge of NSDL earlier. SEBI also approved in principle that Madras Stock Exchange members could be allowed to trade on NSE's platform.

NHPC IPO likely in July-August

Having missed the opportunity last year to hit the market, power sector giant NHPC is likely to approach market regulator Sebi by May for its Initial Public Offer (IPO).

"We are waiting for the appointment of independent directors... We hope to have them on the board soon as the names have already been forwarded and are under process. The government has extended all support," NHPC Chairman and Managing Director S K Garg told PTI.

"We should be hitting the market around July-August this year and submit revised draft prospectus with Sebi, based on current fiscal's financial performance on March 31," he added.

NHPC, which has a paid up capital of Rs 11,500 crore, is likely to come out with a public offer of 167 crore shares, which would add 10% as fresh equity besides 5% disinvestment. The shares would be face value of Rs 10 each.

The proceeds from IPO would be used to part finance the Rs 28,000 crore expansion plan of NHPC, which has set an ambitious target of becoming a 10,000 MW power generation company during the 11th plan period.

This will be the biggest IPO in the power sector with 167 crore shares on sale, officials said.

Asked about the premium the company was expecting, Garg declined to comment, saying it was too early to comment but exuded confidence of investors' faith on the PSUs as it happened in case of Rural Electrification Corporation (REC), whose IPO was over subscribed by more than 30 times despite uncertainty in the stock market, especially on IPO front.

Anil's first float sinks Reliance image

More than five million investors waited in keen anticipation for the great man's son to ring the opening bell at the Bombay Stock Exchange on Monday and the start of trade in a company that had attracted subscriptions worth US$190 billion.

Anil Ambani, a break-away scion of India's famed Reliance Group, had three weeks earlier overseen the $3 billion initial public offering - India’s largest - of Reliance Power Ltd (R-PL) and added billions of rupees to his own vast wealth as his fellow Indians bought into his aura of almost unearthly success.

Then the bell rang, and for the first time in history of Indian stock markets the Ambani magic did not work.

Reliance Group companies are known for producing stock-market gains from the moment they are listed, and for a few moments on Monday money seemed there for the taking once more as Reliance Power surged 19% to 538 rupees from the IPO price of 450 rupees (US$11.42).

The promise of lucre hung there for a few seconds, before the dream vanished and R-PL dived to 355 rupees per share never to return even close to the issue price in the next five and a half hours of trading. By the close, it was down 17% at 372.50 rupees, $4 billion of its market capitalization wiped out and with it billions of rupees of investors’ wealth. And tarnished, if not also destroyed, was the invincible image carefully built over three decades by Anil's father, the legendary Dhirubhai Ambani, that an Ambani-float never loses money.

In the following days, the nightmare worsened as another $5 billion of the market capitalization was lost. By Thursday the stock was trading at around 364 rupees.

The sharp decline "was a big disappointment for millions of investors who applied [for the shares] with high hopes driven primarily by the high-profile marketing of the IPO", said Mumbai-based investment advisor S P Tulsiyan. "But the worst fallout of the flopped listing is that retail investors have lost faith in the Reliance Group, particularly in the Anil Ambani faction."

The blow was severe and went far beyond Reliance Power. The listing affected not only the stock prices of companies controlled by Anil Ambani; it also impacted the share prices of the companies of Mukesh Ambani, who controls a slightly larger share of Reliance Group.

The price of all Reliance stocks, including flagship Reliance Industries Ltd [RIL], were hammered for the next two days. It was a roll call of Indian industry - Reliance Petroleum (like Reliance Industries a Mukesh Ambani company), Reliance Communication [RCom], Reliance Energy, Reliance Capital, Reliance Natural Resources and all other Anil Ambani-managed companies shed anywhere between 6% to 25% of their market capitalization in the period.

"The Reliance Power debacle has taught me to never take the Reliance Group for granted,'' said Rajesh Patwa, an investor. "From now on I’ll think twice before investing in Reliance companies, particularly in their IPOs."

Patwa was not alone in his reaction, according to Shankar Sharma, head of First Global Stock Broking Ltd, a Mumbai-based stockbroker and investment banker. "It is clear that the perception of a sort of infallibility the Reliance Group has been created over the years has been shattered with the debacle of the R-PL listing," he said. "The next time, any IPO from this group has to be priced with some fundamental safety net."

Large scale
Like his elder brother Mukesh, Anil Ambani does everything at an absurdly large scale. Where his brother's Reliance Industries features as the largest private sector enterprise in India (and comfortably ranking in the Fortune 500 list) with over $27 billion in revenues, Anil had to make sure that RCom, the mobile telephony company he controls, is the largest in its sector. If Mukesh Ambani embarks upon building the world's largest petroleum refinery - through Reliance Petroleum - Anil too has to build Reliance Power as one of the world's biggest power plants using clean-burning natural gas.

Both brothers have cashed in on the goodwill of Dhirubhai, who died in 2002 after shaping India's equity culture by attracting millions of retail investors in a market that was then dominated by financial institutions. Through repeated public offerings of Reliance Industries since its IPO in 1977, none of which went below their issue price, Dhirubhai revolutionized the country's capital markets by generating billions of rupees in wealth for those who put their trust in his companies.

The IPO of Reliance Power, which had no assets and little cash flow to boast off, benefited from the Reliance brand name and also the present euphoria in India's stock markets, attracting subscriptions for 73 times more shares than were available.

It was the first company flotation by Anil Ambani's ADAG (Anil Dhirudbhai Ambani) Group since he carved it out after splitting with his brother following the death of Dhirubhai in July 2002. The ADAG Group's five previously listed companies were all spun off from Dhirubhai’s Reliance Empire when his sons formally split it in January 2006.

The Reliance Power debacle is intriguing considering the fact that barely a month back, the announcement of the IPO had investors from around the world scrambling to get a piece of the company. Qualified institutional investors (read foreign institutional investors) poured in $100 billion to oversubscribe their share of the float by 82 times. Rich investors or high-net worth investors (HNIs as they are called in India) who had put in single applications worth $260,000 each were even more aggressive, bidding for 163 times more than the number of shares earmarked for them. Retail investors - those who had put in $2,500 worth of applications each - oversubscribed to the extent of around 15 times.

So what went wrong? The debut was not helped by a souring in global market mood as the reverberations of the US subprime and credit crisis swept around the world. Between January 4, when the IPO was announced, and the listing date of February 11, the benchmark Sensex index fell over 4,000 points, or almost 20%, from historic highs of around 20,686 points to 16,630.91 points.

The Indian stock market was also particularly weak on February 11, when it fell by 8%. But that according to analyst that was due to the Reliance Power debacle as investors sold other shares to pay for losses after buying the stock on borrowed money.

Some say Reliance Power's downfall was linked to aggressive pricing of the IPO. "As we have been warning right from the day the IPO pricing was announced, it was too richly priced," said S P Tulsiyan in Mumbai. "According to our calculations, the IPO was at least 20% overvalued when compared with peer companies in India. For instance, the IPO price was assigned a phenomenal price-to-asset value ratio of 6, for a company that does not even have a power plant on the ground. Whereas NTPC (a local power company), which already has as as big a project as what R-PL proposes to set up by 2010, trades at around 3 times its present asset value."

Tulsiyan blames this overpricing squarely on the merchant bankers who marketed and managed the IPO, and on the market premium in the grey, or unofficial pre-listing, market where the stocks changed hands at prices that encouraged many buyers of the IPO to believe that they would easily get an immediate return on their investment.

Critics add that Anil along with the merchant bankers also created hype through a pre-IPO advertising blitzkrieg that with the slogan "Power On, India On" tried to portray India's scorching economic growth is solely dependent on availability of power. Anil dismisses the allegation: "To say that nearly 500 sophisticated institutional investors from across the globe, and 5 million retail investors, were all taken in by hype to an extent that they committed a staggering $190 billion is an unfair comment on their collective intelligence and understanding."

Still,the Reliance Power listing would have missed disaster had not almost every investor who applied in the IPO done so just to make a quick buck, according to Sharma of First Global. "Everybody bought to flip and not as an investment," he said . Flipping is the practice of buying IPO shares and selling as soon as trading begins, usually for a substantial profit and not just for retail investors lucky enough to get offer shares. Institutional investors get most of the shares at the offering price and stand to gain hugely from the practice, particularly in a hot IPO market, when the price of a new company often rises dramatically above the offering price on the first day.

"This includes everybody from the financial investors to high net worth investors to even retail investors. But what is very surprising is that the foreign institutional investors who claim to have great insight into financial markets, great modeling skills, and global investing experience could not pick wheat from the chaff," Sharma said.

The Reliance Power listing, debacle though it was, of course had an upside; it made Anil Ambani, already the world's sixth-richest man according to the Forbes List, move a notch higher. Rough calculations suggest that with the listing, Anil's net worth surged $13 billion, closer to but still about $6.4 billion below his brother Mukesh's $51 billion net worth.

Even after the sale, Anil holds 46.96% of Reliance Power shares directly and 15.49% through Reliance Energy, of which R-PL is an offshoot. The new listing increased the market capitalization of ADAG Group by $21.5 billion to $78.77 billion.

Rs 250 cr stuck in grey market

Traders spar over R-Power public offer.

With some of the punters now refusing to honour the grey market deals in Reliance Power (R-Power), positions worth Rs 250 crore are still to be settled in this illegal market for initial public offers (IPO). CREDIBILITY CRISIS With R-Power stock struggling to close above the Rs 350 level against the issue price of Rs 450, some of the clients are refusing to honour the deals A similar payment crisis in the grey market was witnessed in 1992-93, when a scheme of Morgan Stanley was listed on the stock bourses Deven Choksey of KR Choksey Shares has come out with a white paper demanding a crackdown on the grey market According to dealers in the know, the Reliance Power IPO had generated deals worth Rs 2,500 crore in the grey market, of which nearly 90 per cent were settled till Wednesday.

However, with the Reliance Power stock now struggling even to close above the Rs 350 level against the issue price of Rs 450 after three days of listing, some of the clients are refusing to pay, according to sources.

The stock was quoted at a premium of over Rs 400 in the grey market until the issue closed for subscription on January 18.

“Most of them have suffered huge losses on account of lacklustre listing of the stock and are therefore demanding more time of pay-up. But those who have not honoured their positions would not be allowed to trade in the other IPOs,” said a dealer.

A similar payment crisis in the grey market was witnessed in 1992-93, when a scheme of Morgan Stanley was listed on the stock bourses. While all the grey market deals were done at Rs 22, the stock was listed at Rs 8 against the issue price of Rs 10.

Market operators believe that most of the pain in the grey market was out as a majority of the deals was honoured. Players said new bets would be accepted from Friday for the Rural Electrification Corporation (REC) IPO.

Stock market experts, meanwhile, have cautioned all the investors to stay away from the unregulated market run by vested interests. They are of the view that grey market premiums are often rigged by merchant bankers who want the issue to be fully subscribed.

Deven Choksey, the managing director KR Choksey Shares and Securities, today came out with a white paper demanding a crackdown on the grey market by plugging the loopholes in the system.

Choksey is of the view that a technological upgrade by making the IPO bidding process online could curb the notorious grey market operation, which was gaining prominence for price discovery among small investors.

“The book-building system has a limitation as pro-rata allotment is systematically misused for creating artificial demand for the IPO. Investors, in turn, apply for far more in excess of the actual requirement as they calculate the actual allotment based on the number of times the IPO is subscribed. Moreover, the subscription is misunderstood as the actual demand, which, in turn, is used by the grey market for arriving at the listing price,” he said.

Pipavav Shipyard awaits SEBI nod for IPO

Pipavav Shipyard, PSL has bagged India's largest ship building order of USD 1.06 billion for 26 Panamax Bulk carriers. The company has entered into agreements with three international ship owners for the construction of these bulk carriers (including options for four ships which have been exercised) of 74,500 DWT each.

These ship owners are Golden Ocean Group Limited (Norwegian Group, Norway), SETAF s.a.s (Bourbon Group, France) and AVGI Maritime Services S.A. (Kyrini Group, Greece).

In an interview with CNBC-TV18, Nikhil Gandhi, Chairman, Pipavav Shipyard said that the first delivery of the bulk carrier would be by March 2009 and the balanced by May 2012.

The aggregate DWT of vessel construction orders in order book is approximately 1,937,000 DWT.

PSL has received initial payments from ship owners aggregating USD 150.62 million (Rs 6, 091.1 million). These contracts have an aggregate face value of approximately USD 1,063.12 million (Rs 42,992.6 million).

Pipavav Shipyard is currently constructing a shipyard complex at Pipavav, on the west coast of India adjacent to the maritime sea lane between the Persian Gulf and Asia. The Shipyard will have an estimated investment of Rs 2,888 crore.

Pipavav Shipyard will be capable of ship construction and repairs for a range of vessels of different sizes and types, as well as the fabrication and construction of offshore platforms, rigs, jackets and vessels, for use by oil and gas companies in their exploration and production activities.

The company proposes to part finance this project cost with the help of Rs 1,248.67 crore (including premium) raised through equity already issued and term loans from banks and financial institutions to the tune of Rs 935.2 crore.

To meet the remaining funding requirement, Pipavav Shipyard proposes to enter the capital markets with a public issue of 86,850,000 equity shares of Rs 10 each through 100% book building process. It has already filed DRHP with SEBI for the purpose.

Gandhi also added that the company has already signed Pre-IPO placements and waiting for SEBI nod for this IPO.

JM Financial Consultants Pvt. Ltd, Citigroup Global Markets India Pvt. Ltd and Enam Securities Pvt. Ltd are the book running lead managers for the Issue. SBI Capital Markets Ltd, Kotak Mahindra Capital Co. Ltd and Motilal Oswal Investment Advisors Pvt. Ltd are the CO-BRLMS for the Issue. IL&FS Investsmart Securities Limited is Advisor to the proposed offerings. Punj Lloyd holds nearly 25% stake in Pipavav Shipyard.

The IPO Deep Freeze

Reliance Power's poor listing was the last straw. The domestic IPO market has slipped into a deep freeze and is unlikely to see a revival soon. But, investors have only themselves to blame! By Vivek Sharma

The new issues frenzy, built on the excellent returns made by IPO investors last year, peaked last month when the Reliance Power issue opened. At nearly $3 billion, it was the biggest ever IPO by an Indian company and the biggest global IPO so far in 2008. The massive marketing effort to promote the issue was unprecedented and resulted in lakhs of new retail investors opening demat accounts, in the hope of making quick profits. Institutional investors, both domestic and foreign, also briefly suspended their self-proclaimed ability for sane judgment and jumped in.

The issue was fully sold within a minute of opening and by the time it closed, had generated demand of nearly Rs7.5 lakh crore and was subscribed a massive 73 times. Grey market trading in the stock had taken off in right earnest even before the issue opened. Premiums of over Rs450 per share in the grey market definitely boosted investor demand for the IPO. Business television channels fuelled the frenzy by providing regular updates of grey market price changes.

When the IPO opened, market pundits were confident that investors would double their money. All they had to do was place a bid and pray for an allotment. If only, making money was all so easy!

Markets started tanking the day the Reliance Power IPO opened and the indices have now retraced most of the up-move made late last year. Even though the grey market premium continued to lighten, most analysts were expecting some gains for the stock on listing. But, that was not to be as Reliance Power became the first stock from either Reliance groups to close lower on debut.The large IPOs - Wockardt Hospitals and Emaar MGF - that followed Reliance Power suffered from the weakened market sentiment. Both issuers cut their offer price bands and extended the offer period, but to no avail. Investor interest had vanished and the issues were withdrawn. Other issuers who were set to hit the market are unlikely to go ahead. What a change in fortunes this has been for the IPO market, in barely over a month!

Big gains of 2007 can no longer sustain investor interest
Most IPOs that hit the market last year did generate good returns for investors. Though the sharp market rally towards the end of the year helped, last year's IPOs were generally of better quality with established businesses and were more reasonably priced.

Even after this year's correction, most of last year's bigger IPOs are trading higher than their issue prices. Television broadcaster GBN is among the best performers, now trading more than three times its issue price. Credit rating company ICRA and retailer Vishal Retail have also given similar returns to investors. Indian Bank is trading well over double its issue price while telecom major Idea Cellular is quoting 40 per cent above issue price, even after the recent correction.

Last year saw two large infrastructure developers hitting the market. Stocks of both Mundra Ports and Maytas have appreciated substantially since their listing. Among the issuers from the financial services sector, Religare has appreciated sharply while Motilal Oswal has offered more modest returns. Even Future Capital, which completed its issue just ahead of Reliance Power, had a good listing and continues to trade above its issue price.

Real estate developer DLF was easily the most high profile IPO of last year. Even though there were concerns of high valuations about the much delayed issue, the stock has offered good returns since listing. Among other builders that offered shares last year, Aakruti Nirman has doubled from its issue price while HDIL has offered more modest returns. ICICI Bank mopped up more than $2 billion in a follow-on offer and the stock is still in the money.

Past gains have been the main factor driving the IPO market towards the end of last year and early this year. But, as the markets came under pressure, part of the gains in recently listed stocks vanished. Startled by the suddenness of the recent market fall, most investors have been scared-off new IPOs. But, issuers still tried their best to push their offers.

Big fat dreams to get cancelled or delayed
Rs75,000 crore - that is the kind of money that was expected to be mopped up by companies from the primary market this calendar year. That would have easily been a record, almost double of what was raised in 2007 and three times the 2006 figure. It would still not have taken us anywhere close to the Chinese, as a single Chinese issuer - Ping An Insurance - is planning a $22 billion IPO this year!

Of course, a majority of the issuers in the IPO pipeline are from the infrastructure and realty sectors that are most fancied in the markets these days. Issuers planning the biggest floats were power generation companies with 'ultra-mega' ambitions, property developers who were determined to 'build a new India' and the few who are into building roads and bridges.

Encouraged by the Reliance Power 'mania', many other established business groups have ventured into power generation. JSW Energy from the JSW Steel group, Sterlite Energy, which is a part of Vedanta group and Jaiprakash Power Ventures, were among the early birds with billion-dollar IPO plans. Others like Hinduja, Essar and Ispat were also rumoured to be interested in joining the fray.

After all, power generation had become a once in a lifetime opportunity to own companies valued at tens of billions of dollars - even before going through the trouble of actually building a business. All an entrepreneur had to do was float a company, finalise the details of a few large power projects, get preliminary approvals from the government and sell a minority stake to the public.

Once the stock gets listed on the exchanges, the promoter is a shoo-in to next year's Forbes list of billionaires.

Preliminary approvals are easy to come by, as power generation is a priority for the central government. State governments are ready to do anything to attract mega industrial investments. Questions on business models and valuations were, till now, being brushed aside. How long will it take to acquire sufficient land and start construction? Doesn't matter! Can these power companies build adequate fuel linkages, especially when fuel prices are soaring? Again, doesn't matter! Aren't the state electricity boards, who will be the major customers, already bankrupt? Who cares? Look at the projections, instead.

Dreams of real estate developers were no less impressive and the pedigree of some of them was even better. Emaar, co-promoter of Emaar MGF, is one of the biggest builders in the Middle East and is now building the world's tallest building - Burj Dubai. Future plans of some of these developers are like that incredible structure coming up in the Arabian Desert, the final planned height of which has not yet been disclosed!

None of the builders will accept that the property market is cooling off and prices are correcting. Even if that is the case, they argue, this is only temporary blip. The great Indian middle class will buy homes, even if they have to indebt themselves for life. And demand for commercial space will rise forever, irrespective of rising supplies, as economic growth shifts to double digits. These are some of the impressive stories that were being sold to investors!

After the Reliance Power and Emaar MGF fiascos, all these planned big issues will be postponed indefinitely. Given the cloudy market outlook, it will be quite a while before they can think of peddling the big dreams once again.

The only potential big issuer outside the infrastructure-realty space is SBI, which is planning a follow-on issue to shore up its capital base. Given its lower valuation when compared to its private sector peers, the issue would not have been excessively priced anyway. Interestingly, SBI - if its issue goes through - will be the only mega issuer this year with an established business!

Investors have only themselves to blame
Early signs of the IPO market topping out were visible from the second half of last year itself. Encouraged by the success of the early real estate IPO's like DLF, Akruti and HDIL, the subsequent issuers from the sector priced their IPOs higher. Interestingly, all the four property stocks that were offered during the second half - Brigade, Puravankara, IVR Prime and Omaxe - are all trading well below their offer prices, with IVR Prime having more than halved from its issue price!

This is not the first time bunching of excessively priced IPO's has happened just before a market decline. The worst was probably in the mid-nineties when thousands of companies just vanished after raising money through public subscriptions.

The promoters disappeared and a never-ending probe by the ministry of company affairs has not yet found any of them. This won't be the last either, as there will be a long queue of issuers to offer shares at the highest possible valuations whenever market sentiment improves.

It is easy to blame issuers and their merchant bankers for pricing these IPO's way above any kind of justifiable valuations. When markets are on a high, selling a mega IPO is easier than selling chilled soda in a desert - like the kids do in an old Pepsi commercial. Promoters and investment bankers will only be too happy to do so.

Promoters, without any track record in a new sector, cannot be blamed for taking immature businesses public when they are allowed to do so, particularly during a friendly market phase. It is in the promoters' interest to raise capital at the least possible cost. That means demanding the highest possible price multiple on projected earnings, which in turn requires them to promote dreams and promises to support that price.

It is the job of investment bankers to help the issuer get the highest valuation possible. It is not their business to protect the investors' interests. After all, they get paid by the issuers - not by investors! Yes, there is the risk of an odd high-price IPO being cancelled when the markets turn weak. But, investment bankers are smart enough to know that investors' memories are extremely short. When the market improves and after a couple of IPOs make money, investors rush in - whatever the price may be.

Investors who get carried away by market frenzy and are ready to believe any improbable investment story will eventually lose money. It is sad to see even institutional investors ignoring their fiduciary responsibility and making extremely risky short term bets. All these have happened before and will happen again!

Greed is bad for listing-gain hunters

Two out of three IPOs since January 2007 have listed at a premium, so investing in them was a good bet for those seeking to make a quick buck. As a natural corollary, the grey market —- or the unofficial 'bourse' where investors trade informally through verbal, but fully honoured, transactions —- has been booming: 70 of 107 public issues of the past 14 months have given punters a neat profit on listing day.

So when shares of Reliance Power, the mother of all Indian IPOs, was set to open, the grey market, especially in Gujarat, went into a frenzy, with quotes soaring to Rs 900 or twice the issue price.

It is this milieu that lured Sudarshan Nair, an executive with a logistics firm in Mumbai —- and lakhs of others —- to borrow money and invest in the IPO.

Like everyone else, Nair also wanted to make the quick buck.

"Thank God I got allotted only 17 shares," he said, quivering in hindsight.

But Nair's keeping the faith and not selling now.

Naresh Kothari, co-head of institutional equities at Edelweiss Capital says that's par for the course.

Quarterly results of corporates: Check out

"Retail does not normally sell at a loss. They would have held on primarily because it has gone below that acquisition cost. And some would have also taken a fundamental view, knowing that the Ambani brothers are creators of wealth," he said.

"My take is that it's the conventional IPO flippers, such as hedge funds, and to a certain extent, high networth individuals, who sold on Monday," he said.

He added that domestic banks may not have sold either as they typically do not sell at a loss.

But, apart from HNIs, thousands of others such as qualified institutional buyers, foreign institutional investors and hordes from the Gujarat were doing.

The hit may not be very hard for these investors because the weighted average price per trade was Rs 417 on the NSE and Rs 413 on the BSE.

"Deliveries were at 32 per cent of the total volume of 19.83 crore on the exchanges," points out Amitabh Chakraborty, president-equity, at Religare Securities.

"I can't say whether this is good or bad, but the point is, the shares have shifted to stronger hands —- who else can take delivery in such a market?" he asks.

After opening at Rs 547.8, and making a high of Rs 599 immediately through some clearly false trade, it was all southwards for the Reliance Power share on Monday. Total volumes indicated 87 per cent of the floating stock of 22.8 crore shares changed hands.

The percentage is not large as some listings have racked up turnover upwards of 100 per cent of floating stock, but what pressed prices —- and the broad market —- down is the sheer number in Reliance Power's case. By the end of it, the share recorded a traded volume of Rs 8,243 crore.

Vinod Kumar Sharma, head of research at Anagram Securities, says not a single tear needs to be shed for those who got in with a one-day horizon.

"With open eyes, they got into a company that said that it will have its full 28,800 mw generating projects ready only by 2016," says Sharma.

That the Sensex, following cues from the rest of Asia, fell over 1,000 points intra-day, and closed at 16,630.91, 834 points below the previous close, did not help the Reliance Power IPO in any way.

But unlike Nair, who had bought the share with his own money, and thus was not compelled to sell, there were others, especially HNIs who were forced to unload at a loss because they had borrowed at exorbitant rates to fund subscription applications. At 16-19 per cent interest rates, such investors would have broken even only if the shares debuted at Rs 550-590.

But, many of them may not have had to sell, because of the marginal allotments they got. "As such, they could have financed the purchase out of their own pockets and returned the borrowed money," says Sharma.

For those like Nair, who are waiting for a better day to sell, it may be a while before that day arrives.

"Reliance Power should trade near Rs 300 for sometime," bets Anmol Sekhri, fund manager at Bonanza Portfolio.

How does the grey market work?

The grey market has had a nice run in the bull market, particularly with regards to IPO premiums. For instance, the grey market has been buzzing with whispers about about the possible level at which Reliance Power IPO will list. The situation is such today that every IPO is being judged on the basis of its grey market premium. It is believed that people will base their assesment on such premiums to decide on buying an IPO.

CNBC-TV18 spoke exclusively to some grey market participants to throw light on how it works.

One such participant pointed out that there hasn't been much trading in the grey market at this point in time. The reason, he said, is that people are waiting for Reliance Power to list on February 11. Only once it has listed and the payments settled, will fresh orders be taken for other issues.

He informed that Reliance Power's current grey market premium is approximately Rs 165-170 per share, whereas a month ago, it was about Rs 450 per share. Investors who bought Reliance Power's shares at that high premium will most definitely lose money.

Today's price being Rs 165-170 per share, the difference will have to be borne by the investor and the payment will have to be made within two days post listing.

Already some 5.5 - 6 crore shares of Reliance Power have changed hands on the grey market.
"On February 11, it is expected to list at Rs 580-600, but if selling pressure comes in, the stock can go down to Rs 550 levels," he forsees.

Modus operandi

Major centres of grey market operations are in Rajkot, Ahmedabad, Gujarat, Jaipur, Palanpur, Bhuj, etc., the trader said. They do multiple share applications and trade in the grey market.
The entire trade is done on 'cash only' basis.
He revealed that even if the client is trustworthy, all orders are accepted mostly through a sub-broker who will get a 0.25-0.50 paise commission per application. The onus for settlement then, is on the sub-brokers. Although, there are some clients who do direct dealings as well.
For example, if a trader sells to a client at Rs 450 per share, post listing whatever is the premium or discount, the payment will be settled in two days through the sub-broker.

He, however, reminds that "all transactions are settled in cash and this is a business of mutual trust."
Since mutual trust is involved, there's always an execution risk. But he counters that. "Long time ago, say 25-30 years, when there was no F&O market, there was the 'vaida bazaar'. Trades were done late at night, but were punched and executed the next day. This is similar to that. The trades are not written, but it is based on trust," he explains.
Similar enthusiasm fogged the Future Capital IPO; investors in the grey market bought shares at Rs 400-500 and some even at Rs 600 per share. The stock listed at Rs 1,100 and slipped down to Rs 950. Investors lost money in Future Capital as well.

How a deal is cracked:

Sample the conversation below between the CNBC-TV18 undercover reporter and a grey market operator.

I need to trade. How do I go about it?
Broker:Nifty or IPO?
Investor: IPO. If I need to trade in Reliance Power?

Broker :The rate is Rs 170/sh.
Investors: What is the minimum tick?

Broker: 1,000 shares.
Investor: Isn't there a tick for 500 shares?

Broker :No, I won't make money by doing only 500. Where do you stay?
Investor: Mumbai

Broker: No a 500 tick is not feasible for Mumbai.
Investor: Is the grey market premium different for different areas?

Broker: No, it does not depend on area. But at a 500 tick, the transaction amount would be Rs 5,000. How will we settle the transaction? It is far.
Investor: Will I have to pay in cash?

Broker: The settlement is done only in cash.
Investor: If I want to buy, don't I need to pay you something right now?

Broker: No, you don't have to pay anything right now. If the rate is above Rs 450, the cut-off will be Rs 450 only.
Investor: How will the settlement be done?
Broker: In cash.

Investor: And if the price comes down, then I'll have to pay the difference.

Broker: Yes.
Investor: So, how will it get settled? Will I meet you?

Broker: All that we will see, but for now trade for 1000 shares first. If you want to sell, I will buy for Rs 160/sh and if you want to buy, I will sell for Rs 170/sh.
Investor: And is there anything for Emaar?

Broker: Emaar is at Rs 19-20/sh
Investor: And how is all this done?

Broker :I will teach you all that, but do you want to trade right now?
Investor: Reliance Power. I want to buy 1000 shares.

Broker:Ok. Will tell you after making the transaction.
Investor: What price?

Broker: At Rs 170/sh.
Investor: Is it done at Rs 170?

Broker: I will tell you now in two minutes after buying.
Investor: Sir, what happened?

Broker: The trade will happen, but it is not advisable to buy right now.
Investor: Why? What happened?

Broker: People are saying that it will fall further. See, there is no panic as such. You will get as many shares as you want.

Broker: Trade is done at Rs 160.
Investor: Done at Rs 160?

Broker: I will explain everything to you. I'm picking up your trade.
Investor: Yes.

Broker:I have bought 1000 shares for you at Rs 160.

Broker: The premium for Reliance Power is at Rs 115-125/sh. There is no buyer, you wanted to buy it based on your information.
Investor: Right now I can give Rs 5,000-10,000, not more than that.

Broker: What if you incur a loss of Rs 50,000?
Investor: I don't have more than Rs 5,000-10,000.

Reliance Power listing may lift the market spirit up

MUMBAI: "We are just one day away from the worst (for the market) to end," said Angel Broking's Lalit Thakkar, referring to the listing of Reliance Power on Monday.

Reliance Power raised a whopping Rs 12,500 crore from its initial public offering.

"We feel the market is near the bottom and the last news (listing) of Reliance Power needs to be digested. After that, there is no negative news," he added.

The Reliance Power IPO was subscribed over 73 times. However, with the sentiment in the secondary market turning bearish, the grey market premium for the first offering from the Anil Dhirubhai Ambani group company declined to Rs 125 from Rs 450 earlier.

"Although the euphoric sentiment is out, earnings momentum still seems intact. What needs to be seen how much of sentiment Reliance Power can spoil. Having said that, we have already crossed almost 90 per cent of the danger zone and the last 5-10 per cent of the threat lies with the listing of Reliance Power. So if Reliance Power does not get the right amount of response, it could dampen sentiment. But since we are at the fag end of the negative phase, we expect the market to recover by after a couple of hours of the listing," Thakkar said.

Indian equities have been through a rough patch over the past three weeks as global markets succumbed to repeated indications that the world's largest economy is sinking into a recession.

Bombay Stock Exchange's Sensex retreated more than 8 per cent from Jan 18 till today. The first tremor was felt on Jan 21 when the 30-share benchmark saw the biggest intraday fall of 2,062 points in its history.

As the volatility increased, its effects also could be seen in the primary market. Emaar MGF Land was forced to withdraw its IPO due to poor response, a day after Wockhardt Hospitals pulled out for the same reason.

"The primary market continues to be vibrant, but the kind of valuations that are being commanded need to be sobered down. IPO mobilization will not come down but the pricing needs to be changed," Thakkar commented.

Reliance Entertainment plans IPO

Anil Ambani is planning another initial public offer (IPO). After Reliance Power and Reliance Infratel, Reliance-ADA Group company Reliance Entertainment is now understood to be finalising plans for an IPO.

The company is expected to file the Draft Red Herring Prospectus (DHRP) with the Securities and Exchange Board of India (SEBI) soon after the budget. Reliance Infratel, which had filed the DHRP prospectus on February 4, would receive the mandatory approval in the next 15 days.

For the Reliance Entertainment issue, Kotak Mahindra and JM Financials are likely to be the investment bankers. A spokesperson for the ADA Group said: “We do not want to comment on speculation.” An analyst with a Mumbai-based research firm said: “Right now, it is difficult to arrive at a valuation for Reliance Entertainment. There could be restructuring of the company’s businesses. This could involve transferring certain related businesses to Reliance Entertainment.”

After soaring to their peaks, valuations of entertainment companies have taken a major hit during the recent market meltdown. While TV 18 has a market capitalisation (price multiplied by the number of traded shares) of Rs 4,961 crore as on February 6 2007, UTV’s market capitalisation was at Rs 1,961 crore.

The group has put all its new-age businesses like gaming and home entertainment under Reliance Entertainment. While Zapak is company’s gaming business, BigFlicks is its home entertainment venture.

The company is also eyeing a presence in the television segment through channels it has planned to launch. “Reliance Entertainment is taking its time to decide whether the IPO should be timed before the launch of its DTH service-Big TV or after it,” said the executive of an entertainment channel.

SEBI puts pre-IPO PE deals under scanner

MUMBAI: Private equity (PE) deals struck ahead of initial public offerings (IPO) have come under regulatory glare. The capital market regulator, SEBI, has taken a serious view on such pre-IPO deals, where companies have raised debt through issuance of ‘IPO convertible’ — a hybrid instrument which is debt in the garb of equity.

Market sources said many pre-IPO deals struck last year had a now-familiar instrument called IPO convertibles. “It is nothing but debt, since companies do not freeze the pricing at the time of the deal and allow investors the freedom to buy equity at the IPO price at a later date when the company goes public,” said a Mumbai-based investment banker. Sebi is believed to have now asked companies that are going for IPOs to “freeze their pre-IPO pricing” and “to fix their IPO pricing independently”.

Sources said the regulator is likely to announce measures to check pre-IPO deals involving IPO convertibles. Several attempts by ET to get a response from Sebi proved futile. An e-mail query did not elicit any reply. In 2007, private equity players had emerged as the most preferred investors for corporates, enabling them to raise a record $17 billion (around Rs 69,159 crore) during the year, according to Grant Thornton, a global financial and business advisor.

The capital mobilised through PE deals last year was higher than the funds collected through IPOs, follow-on offers and qualified institutional placements (QIPs). A senior official with a PE firm said half of the PE deals struck in 2007, especially in certain sectors like real estate, involved IPO convertibles. “Any check introduced on IPO convertibles will bring in transparency in the primary market. Also, pre-IPO deals tend to influence the of investors who are unaware of the fact that the pre-IPO pricing is, in fact, not fixed,” said another investment banker. The government had earlier raised concerns about the increasing capital inflows affecting the value of rupee.

It is being examined whether restriction on external commercial borrowing (ECB) are being side-stepped through such placements of quasi-equity instruments. The ECB rules suggest that the debt has to be fixed at Libor plus 2 percentage points.

At the time of IPO, merchant bankers work out a valuation based on forward multiples of comparable peers. It also depends on the company’s business plan and its projections. There are industry-specific valuation methods: for instance, for real estate, net asset value (NAV) could be considered while for banks and financial companies, price to book value could be an indicator. Similarly, price-earnings multiple or EBIDTA-multiple could be used for the manufacturing sector.

Last year, Indian companies sewed up 386 PE deals, mainly in real estate, infrastructure and financial services space. The IT & ITeS (IT enabled services) segments led the PE charts in terms of volumes, accounting for 66 deals. Some of the top deals last year included Temasek Holdings’ $1-billion investment in Bharti Infratel, another $1-billion investment by Deutsche Bank, Citigroup and other international investors in GMR Infrastructure and ICICI Venture Funds’ $800 million in Jaypee Infratech.

ICICI awaits RBI norms on holding firms

ICICI Bank is still awaiting Reserve Bank of India’s final norms on bank holding companies, said Managing Director and Chief Executive Officer K V Kamath today.

“We are waiting for the discussion paper. We will wait,” Kamath said. On Friday, ICICI Bank scrapped the deals entered with investors who had intended to pick up stake in the bank’s proposed holding company, ICICI Financial Services.

Last date of the agreement with these investors had lapsed on Thursday as regulatory approval had still not come, the bank said. The bank was awaiting approvals from Reserve Bank of India, Insurance Regulatory and Development Authority, and Foreign Investment Promotion Board.

RBI had expressed its discomfort of banks setting up holding companies as these entities would be outside the central bank’s supervision limit.

In November, RBI had extended the date of releasing the draft norms on holding company, but did not set any final date for announcing the guidelines.

On whether valuation of the holding company has fallen due to delay in the approval from RBI, he said: “I don’t want to speculate. We are content with growing our business and we will remain content. We will see what happens.”

Kamath reiterated the country’s largest retail lender has still not decided on reducing lending rates on sectors like home and car loans. “This is the last quarter and normally there is a lot of credit off-take and demand.

So we will have to wait and watch. This is not the right time for me to talk on interest rates,” he said.

Kamath expects home loan demand to revive in the next financial year. “Demand will come back once you have price correction in property markets and affordability in terms of cost of homes and interest rates.”