I was hooked to these thoughts for quite some time today.
In 1959, Benjamin Graham (author of The Intelligent Investor) had this to say about Initial Public Offerings (IPOs):
Somewhere in the middle of the bull market the first common-stock flotations [i.e. IPOs] make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues. As the market rise continues, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the prices asked and obtained verge on the exorbitant.
48 years later, it’s exactly what has happened in the current bull-run in the Indian stock market. The symptoms are a perfect match.
So what happens next?
The heedlessness of the public and the willingness of selling organizations to sell whatever may be profitably sold can have only one result – price collapse. In many cases the new issues lose 75% and more of their offering price. The situation is worsened by the aforementioned fact that, at bottom, the public has a real aversion to the very kind of small issue that it bought so readily in its careless moments.
So is the Indian stock market headed towards a south-bound journey?
One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history.
I’d need to research a bit to verify if this statement holds true for the Indian stock market today. I’d appreciate some help here.
You might want to explore Gala Time – A Blog about Indian Capital Markets, by Kaushik Gala. I’m a regular visitor.
Update on September 14, 2007:
From The Economic Times:
In the biggest ever response to a public stock offering, the state-owned Power Grid Corporation of India Ltd. (PGCIL) has received subscription of Rs 1,90,000 crore, a slice of which came from provident and retirement funds – investors who rarely put money into equity. The company will raise around Rs 2,985 crore through the IPO, which has been oversubscribed 65 times. Some of the retirement funds that have put in subscriptions are employee funds of Canara Bank, Oriental Bank and several state electricity board funds.