11 Jun 12 Facebook and the Indian IPO market
Notwithstanding the alleged irregularities in the Facebook IPO, let’s understand that IPO markets have structurally changed over the last two decades. Increasingly, models and rules borrowed from the US have been adopted in other countries, including India.
From a time when the CCI controlled IPO pricing to the free-for-all era we’re in today, the game has changed completely. In the old days, pricing was fixed by a conservative formula, and investors made large gains. Today, pricing is free and it has created a situation of conflict between the issuer/merchant banker and the investor. While the former wants to maximize the price, the latter wants it lower. So at the very start of an investor’s relationship with a company, the situation is adversarial. You lose and I win.
The second transformation has been from retail to HNI/institutional. The industry (read merchant bankers, regulators, brokers, etc) have systematically fed the media and policy makers with the notion that retail investors are not savvy and further, are short term investors (who will flip the stock on listing). Hence, the share of IPOs meant for retail investors has fallen dramatically, while that of “qualified” investors has risen.
But history (and now Facebook) has shown that institutional investors and professional money managers are not too savvy either. Nor are they long-term investors. It’s now pretty clear that fund managers are as prone to trading and short term in-and-out as individuals, and even more likely to follow the herd. Isn’t that what hedge funds are about?
So, IPO markets have evolved to a point where issuers and their bankers treat investors as adversaries, and do their best to shut out retail investors. But doesn’t this defeat the very purpose of an equity market? I thought equity was to be issued to people who’d take a long term (and high risk) view. Also, that the savings of millions of individuals would then flow to productive entrepreneurs.
Little wonder that Indian retail investors now shun IPOs and equity markets, and are piling into gold and fixed income schemes.