Unlikely, as retail investors subscribe based mainly on grey market premiums
Will the abysmal listing of Paytm affect the upcoming IPOs, especially of fintech companies? Market experts told BusinessLine that even though Paytm’s poor listing could be a sentimental hangover for a short term, IPO investors in India will not stop punting for listing day gains.
Paytm’s shares crashed by 27.25 per cent on the BSE on debut.
The stock opened for trading at ₹1,955 on the BSE marking a decline of over 9 per cent or ₹195 from its issue price of ₹2,150. The shares extended losses later during the day and fell as much as 28 percent from the issue price to hit an intraday low of ₹1,564. Since the Paytm IPO had opened for subscription after the blockbuster listing of Nyaaka, there were huge expectations of listing gains for the market traders.
Based on GMPs
“Paytm listing is unlikely to spoil the apple cart for future IPOs, even those of tech companies. The reason is that retail investors mainly subscribe to IPOs based on grey market premiums (GMPs) and do not go much beyond that. If GMPs are high for any IPOs, it is likely to be highly subscribed. People don’t understand that GMPs are managed by investment bankers in toe with brokers,” said Kishor Ostwal, MD, CNI Global Research.
The grey market is the unofficial market in India where brokers and traders start quoting IPO premiums days and weeks ahead of their listing. Those who feel that they are unlikely to get an allotment in the IPO try to buy shares in the grey market at a premium to the issue price and push up the price further.
But it is a Catch 22 situation since bankers and brokers are known to rig GMPs to create artificial demand for the IPOs. On listing, those who have sold shares have to deliver, for which sellers have to bid at higher prices when the IPO actually lists. In case of Paytm, however, the stock crashed on listing even though it was quoted at a premium in the grey market, indicating the manipulative nature of such trades.
Grey market operators regularly deal with investment bankers and help them get subscription numbers for a price. Hence, even if they suffer a loss in an IPO listing, the bankers assure them of higher profits in other deals and so goes on the business, sources said.
Paytm IPO shares were trading at ₹2,180 in the grey market at a premium of only ₹30 or 1.4 percent over the issue price of ₹2,150 a share.
Also see: Paytm: No cashback, only cash gone!
But from a purists view Paytm IPO may have a short term impact.
“Paytm’s listing could put pressure on companies which are looking to tap the market in near term. The brunt will be more for new-age tech related companies, which investors will now associate with the Paytm listing. Investors will not go overboard in their expectations if valuations sought by IPO-bound companies are too high,” said Arun Kejriwal, Director, Kejriwal Research & Investment Services.
Price to earnings (PE) is a global benchmark used to value companies. It shows the premium that investors pay to a company above its earnings. Paytm has a negative PE ratio since it is in losses.
“Paytm has established that obscene valuations work against investor interest. SEBI should mandate that companies be valued by professional valuers before the IPO. When such valuation reports are disclosed in IPO prospects, there will be some sanity. Forthcoming IPOs should be forced to ensure that their price band is subjected to the valuers report,” said Deven Choksey, MD, KR Choksey Investment Advisors.