The Sensex hit the historic 10,000-mark in February 2006. By now, a sense of euphoria was again suffusing the market. Emerging markets were the flavour of the season across the globe, and India was no exception to the trend. FIIs were buying everything in sight, and the retail money flow into mutual funds too was steadily on the rise. By the last week of April, the Sensex had rocketed to 12,000, and was not showing any signs of fatigue.
Reliance Petroleum was the blockbuster IPO of the year, with the company raising Rs 2,700 crore. The 45 crore share issue, priced at Rs 60 apiece, was subscribed a whopping 51 times, reflecting the frenzied mood in the primary as well as the secondary markets.
As stock market history shows, steep climbs are often followed by equally steep declines. A combination of rising commodity prices, firming up of interest rates globally, and concerns about expensive valuations of emerging market stocks triggered a worldwide fall in equity markets.
The Sensex fell below 9,000 by June, its 30 per cent fall the steepest since the bull market had started in May 2003. Many felt the bull market was as good as over.
GB was among those who had a contrarian view of the situation, thanks to his proximity to top market operators.
‘The economy still appears to be in good health. Companies are still in expansion mode, earnings are growing and jobs are being created. I would not be too worried,’ he told me. I knew he was echoing the views of either Radhakishan Damani or Rakesh. Damani had still not returned to the market, so in all likelihood it would have to be Rakesh’s views.
The crash affected investor appetite for the IPOs that hit the market between June and August. GMR Infrastructure’s issue had to be priced at the lower end of the bidding band of Rs 210-250. The issue was subscribed close to seven times. The institutional portion was subscribed eleven times, but retail investor response was poor. The shares got a lukewarm response on listing day, and could barely manage a 2 per cent premium before ending the day at the issue price of Rs 210.
I wondered where all the institutional investors who had enthusiastically bid for the issue had vanished. If the institutional portion was subscribed eleven times, it meant those who applied had got only one share for every eleven they had bid for. When the share was available close to its issue price on listing, these investors could have bought the remaining shares they had wanted. That there was hardly any demand on listing day suggested that some strings had been pulled to ensure that the issue got a decent response. Still, investors who subscribed to the issue and held on for a year had no cause for regret, as the stock appreciated nearly fivefold over the next eighteen months.
By the end of August that year the global markets had settled down, and in the following month had resumed their climb. The Sensex was crossing 1,000-point milestones at the strike rate of Sanath Jayasuriya in top form. In October, it reclaimed the 12,000 mark, on the first day of November, hit 13,000 and in the first week of December, it topped 14,000.
The mania in the secondary market notwithstanding, one of the high-profile public issues of the year turned out to be an anticlimax for the company as well as its merchant bankers.
Cairn India, the Indian arm of UK-based Cairn Plc, was looking to raise over Rs 6,000 crore through an IPO. Until then, only ONGC had raised a bigger amount – Rs 10,500 crore – through a public issue. But everything seemed to go wrong for the IPO, right from the
moment the issue opened for subscription in December.
The issue, with its price fixed at Rs 160-190, was fully subscribed on the first day of bidding itself. But many institutional investors reduced the size of their bids and revised downward their bid price, with quite a few withdrawing their bids altogether. This had a cascading effect, as many retail investors too chose to withdraw their bids sensing institutional investor apathy. By the last day, it appeared that the issue may not be fully subscribed.
The pedigreed merchant bankers to the issue then had to fill the shortfall by paying from their pockets. Had the issue not attracted enough bids in the first place, the merchant bankers would only have had their reputation to worry about and not their pockets. But with investors withdrawing their bids, the merchant bankers were obliged under their agreement with the company to bridge the shortfall.
The issue was just about subscribed on the last day at the lower end of the price band. In private, the merchant bankers would say that a powerful rival of the company had prevailed on many of the institutional investors to withdraw their bids.
Cairn Plc may have got the satisfaction of raising Rs 5,788 crore through the issue, but more embarrassment lay ahead. The issue had a floppy debut on the bourses in the second week of January, closing at a 14 per cent discount to the offer price of Rs 160.
The year 2007 would turn out to be the high noon of the IPO boom, as 100 companies together raised close to Rs 34,000 crore. With property prices shooting through the roof across the country, realty stocks were a big draw with investors. Little wonder, then, that nearly 43 per cent of all the money raised through IPOs that year was by realty companies.
The chartbuster public issue of the year was the K. P. Singh-promoted DLFs, which raised around Rs 9,200 crore. The company’s road to stock market listing was a long and bumpy one. Some of the potholes are said to have had been created by Singh’s rivals who did not want him to become too powerful.
Realty stocks were soaring to new highs, and ‘land banks’ was the buzzword as real estate firms touted the value of the land owned by them to pump up their valuations. In many cases, the land parcels they claimed to own did not have clear title deeds. Also, investors paid little attention to the execution capabilities of the company, its profit margins, the regulatory hurdles and other challenges in developing the land. An even bigger problem was the lack of transparency in the financial statements of the property firms, given that a lot of their dealings were in cash.
But how did all that matter as long as land prices and stock prices were rising by the day? When the bubble burst the following year, real estate stocks would bear the brunt of the selling fury. But that was still a few months away.
In March, SEBI issued a directive that real estate companies could get land banks valued only if a clear title deed existed. And while the rule was directed at real estate firms in general, DLF’s valuation did take a bit of a knock as its merchant bankers had been pitching
the issue on the strength of the company’s land bank.
When DLF’s plans to go public started doing the rounds in 2006, talk was that the listing would make K. P. Singh the richest person in the country and pitch DLF among the top three companies in terms of market capitalization. When the issue finally got all the required clearances, the number of shares on offer as well as the issue price were less than what had been talked about in merchant banking circles.
The year 2007 was also the high-water mark for the Indian broking industry. In May, the Nirmal Jain-promoted India Infoline poached four senior executives from the French broking firm CLSA. The quartet of Bharat Parajia, H. Nemkumar, Anirudh Dange and Vasudev Jagannath were paid a sign-on bonus of Rs 11 crore each. Parajia and another CLSA colleague Abhijit Raha had become legends in the broking industry by propelling CLSA to the top of the broking league tables. CLSA managed to retain the top slot for a good many years, despite bigger and more established global investment banks snapping at its heels. This was a record sum in the broking industry, where sign-on bonuses had rarely topped Rs 1 crore earlier.
Not just the broking industry, but outsized pay packages appeared to be the flavour of the season across the corporate world, as companies were making massive profits. Just two days before India Infoline had disclosed the details of the compensation package for its new executive hires to the exchanges, Prime Minister Manmohan Singh had corporate India in a tizzy when, at a public function, he urged restraint on ‘excessive remuneration to promoters and senior executives’. India Inc countered Singh’s remarks, saying it was easy to target top corporate executives because their source of income was public knowledge. On the other hand, most politicians who were known to have huge sums of unaccounted money could safely conceal those from the public.
In the last four months of 2007, as the market continued its climb, three well-known brokerages – Motilal Oswal Securities, Religare Enterprises and Edelweiss Capital – issued IPOs. All the issues fetched overwhelming response, and the stocks got off to a flying start on listing. Shares of Motilal Oswal and Religare Enterprises more than doubled in under two months. Shares of Edelweiss Capital surged 83 per cent on listing day itself.
Lucky were the investors who cashed out soon, because after the market crash of January 2008, shares of broking firms would be available for a fraction of their dizzying highs and stay depressed for a long time. And for many years ahead, the main source of income for these firms would be their lending business and not stockbroking.