India's Biggest IPO Turns Bust

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Arko Datta / Reuters

A broker in Mumbai reacts as Indian shares plummet, February 11, 2008.

This year was supposed to be the year of the mega-IPO in India. Financial newspapers and stockbrokers alike have spent weeks licking their lips in anticipation of a series of massive corporate listings that they felt sure would keep India's two main stock exchanges ticking ever upwards. The most hoopla surrounded the February 11 listing of India's Reliance Power Ltd., the biggest in India ever. Shares of the company — a power production and distribution subsidiary of the Anil Ambani-controlled Anil Dhirubhai Ambani Group, one of India's largest conglomerates — were oversubscribed 73 times.

But on Monday, launch day, India Inc.'s plans were dashed. The price of Reliance Power stock plummeted on its first day of trading, taking the Bombay Stock Exchange's Sensex index with it. Investors who had snapped up the pre-market shares for Rs 450 ($11.25) on talk that it would likely double on its opening day, lost an estimated $121 million as the stock headed south, closing at Rs 372.50 ($9.55) — 17% below its cost price. The market dropped 834 points — about 8% — as panic-stricken investors rushed to dump shares. By midday Wednesday the Bombay index was showing signs of a turnaround, though Reliance Power had slipped further, and was languishing below Rs350.

Clearly, a lot happened between January 15, when Reliance Power first offered its shares for sale, and its listing. For a start, any hopes that India might go unscathed following the U.S. subprime crisis have long been abandoned. Yet the drubbing received by Reliance Power shows just how much investor sentiment has plunged. "It used to be said that the two Ambani brothers [Anil and Mukesh, chairman of Reliance Industries, India's largest company] are keeping the stock markets going," says Ajay Kapoor, a Delhi-based entrepreneur and stock trader. "But yesterday showed that the Ambani name is not invincible. These are bad times for small and retail investors." Thousands of middle-class Indians have jumped into the stock market in recent years, eager not to be left out of the profits from the Sensex's rapid rise. "I have a lot of friends who've burnt their fingers," says Pulkit Shrivastava, a young public relations executive who has been investing in stocks since 2002. "Three months back was the perfect time to leave and chill out with your profits. Now, it's time to take it easy, and make a play for the long run."

Reliance Power seems to be following the path of other recent and high-profile Asian IPOS such as PetroChina, the Chinese oil giant that briefly became the world's most valuable company on paper when its shares rose 163% on its IPO last November, valuing the company at $1 trillion. PetroChina's stock price has fallen 50% since then leaving a wake of disillusioned small investors. Wary of similar treatment, Indian companies are now joining the growing list of Asian firms that have deferred IPO plans for this year. Perhaps half of the 30 Indian IPOs slated for 2008 will now be postponed, with the notable exception of government-run Oil India Ltd, which announced that its $378 million listing was on track for March. Private placements worth billions of dollars have also reportedly been put off due to sharp market corrections.

With companies rethinking their strategies and investors remaining frightened, India's booming private sector is going to find it harder to raise money. "We will have to now work harder to figure out how to get people to come out and invest in the market," says Ajay Bagga, CEO of the Mumbai-based Lotus India Asset Management Company. The sharpness of the correction this time may have scared off many entrants, as has last week's announcement by the finance minister that India's growth is likely to slow to 8.7% from 9.6% last year. "It remains to be seen how soon and how much investor sentiment will bounce back," says Bagga. Meanwhile, the market is likely to remain volatile, even if analysts like Bagga are optimistic over the long term. "There may be a sharp pullback still, but I don't see a bear market setting in,” he says. “Market fundamentals are strong, and the macroeconomic situation is strong." Investors hope he's right.