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Government IPOs yield higher returns than private company issues

Apurv Gupta, ET Bureau, Dec 24, 2010, 09.34am IST

State-owned companies' initial public offerings (IPOs) have been more beneficial for investors in the past decade than private companies, which tend to price their offers at steep valuations.

A study of 243 IPOs that were listed between 2001 and 2009 shows that stocks such as Maruti Suzuki and Indian Bank have returned more than companies such as DLF and Future Capital Holdings which led to losses for investors.

"Wealth creation in PSU IPOs handled was substantially higher than that of private companies," says Virendra Jain, who runs a non-profit organisation, Midas Touch Investors Association (MTIA), which has conducted the study. "This raises a question as to why there is such a difference in the performance of the same merchant banker in relation to PSU and private IPOs. Bankers in their quest to grab business give in to demand of the private issuer companies to maximise issue price."

Pricing of IPOs by private companies has come into focus in recent months, with Sebi chairman CB Bhave criticising investment bankers for fleecing investors. Some of the recent issues such as Orient Green Power and IndoSolar have led to losses for investors, while those of Coal India and MOIL, a state-run manganese ore miner, yielded substantial gains.

But bankers believe that the theory need not hold true across the board and that market conditions determine the pricing. "It is difficult to generalise that PSU issues are priced attractively than private ones,'' says Ganeshan Murugaiyan, MD & head of investment banking at UBS Securities India. "A lot depends on deal to deal and the market conditions at a given point of time."

Some state-run companies' issues such as hydro-power generator NHPC and follow-on offers of power utility NTPC did not yield returns for investors. IPOs managed by JM Morgan Stanley (before split), DSP Merrill Lynch and JPMorgan were some of the biggest wealth creators, the study shows. They have yielded a return of around 137%, 73% and 46%, respectively, during the said period through the issues raised by them.

Kotak Mahindra Capital and Enam Securities have done the maximum number of issues of 52 and 57, respectively, creating a wealth of over 54% in all the issues comprising the private and public sectors handled by them during this period. Investment banks that raised 10,000 crore or have handled more than 10 issues were the samples for the study. Prithvi Haldea, managing director, Prime Database, feels that merchant bankers have no role in deciding the price. "It is up to the investors to decide whether to subscribe to an issue or not. Also, bankers cannot be held responsible for issues based on their performance post listing in the secondary market," he adds.

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