Sunday, October 07, 2007

IPO - The Dutch Way?

With the recent Power Grid Corporation of India's IPO jumping close to 100% on listing, the debate is intense on SEBI allowing Dutch auction method for launching IPO. Analysis of few recent IPOs (last 22 IPOs since June 2007) reveals that as much as Rs 4500 crore was left on the table - the difference between closing price on listing day and the IPO price . More than half of this amount can be attributed to Power Grid Corp. On an average this represent a value jump of about 17% which is very much a typical IPO discount to encourage investors overcome the information asymmetry. A closer analysis of top 50% among these IPOs reveal a whopping 75% value jump totaling to Rs 3600 crore. If we drop Power grid from this analysis then it reduces to 45% or little more than Rs 800 crore.

Whose money was it anyway and whom will the Dutch auction benefit?

In case of Power grid it was government's money (direct equity and also the future plans of power grid) which went into the pockets of large institutions.

Analyzing the largest 3 IPOs during the period (DLF, Omaxe and Power Grid) it was only Power Grid which was severely under priced. DLF and Omaxe went up only by 8.6% and 12.9%. So is it about the ability of underwriters to price the IPO or about the ability of management to understand intrinsic value of their own company?

Dutch auction is theoretically a ideal solution which Google tried with its IPO but it was largely unsuccessful in meeting its objectives. The primary reason was execution. Dutch auction put lot of emphasis on investors to accurately price the offer. With lack of credible information and valuation abilities, are investors in a position to invest wisely?


Anonymous said...

How to prove that the underpricing was avoidable and the company could have done better? I am an auditor of the company and would like to have your advice on this.

Abhishek said...

Proving such things in court is almost impossible unless a conspiracy is established to deliberately under price the issue through email records etc. but it is highly unlikely.

Since pricing is a very "art" kind of process and future projections are always subjective. So any pre-thought value can be easily reached. Its only after the issue opens in the exchange that real discovery can happen.

This is more like a "preventable" rather than "curable" disease. The compensation to underwriters should be linked to accurate pricing. Also using Dutch auction kind of methods can protect Govt kind of majority shareholder where chances of value robbery are high.