Abstract:
There are several problems of the Indian primary market. But these problems can be overcome too by mere application of simple rules( end of the article). These remedies have been suggested by experts. Economists attribute these problems to various factors some of which are highlighted below.
The function of the primary market with respect to the market for IPO or initial public offering is to see that various companies are provided with opportunities for the acquisition of growth capital. The primary market has withstood the tests of time.
Inappropriate allotment of shares:
There are many existing problems of the Indian primary market. Some of the instances include the inappropriate assignment of shares to the public as was the case of the ONGC public issues. Due to this there was a lot of confusion among the investors.
Withdrawal of IPOs:
Another problem lies in the fact that these days, IPOs are increasingly being withdrawn. An expert has rightly said that there is no point expressing disappointment in the withdrawal of the IPOs because it may be taken not as an indication of failure of the company and hence the primary market but it may be considered as a disagreement of price between the seller and the buyer. The primary markets are undulating the world over. The incidents occurring in the primary markets are reflections of what is actually happening in the secondary markets. It was fathomed that the IPOs, which were lately taken back had very "aggressive" price bands. The price bands could have been aligned as per existing conditions of the market. The lead managers responsible for the IPOs may also be blamed for the catastrophe. Few are of the opinion that lack of judgment may have led to the withdrawal. "Investors fatigue" is being accounted for in the withdrawals.
"Cornering" of shares:
Recently, there was an instance when investors "cornered" shares, which were to be alloted to the public. The investor was actually a big investor who camouflaged as a small investor cornered many shares.
Grey markets and manipulation:
Other problems of Indian primary markets include over subscription of shares. There are instances when the grey markets usually have high premia, which collapse as soon as the issues are listed. These indicate that for vested interests manipulation in the markets are rampant.
Causes:
Owing to the subprime mortgage crisis in the United States of America, economies around the globe became sluggish and there were fears of recurring recession in the US. The other primary markets of the world were already affected long ago. In fact the Indian primary market has been impacted rather late. Few economists feel that this delay may be attributed to the "decoupling theory" followed in India.
Solutions to the problems:
The following measures have been suggested by economists for overcoming the problems of Indian primary markets.
- The practice of part payment of shares may be removed.
- The process of application money pertaining to the shares could become uniform among different investor categories.
- Restricting a company's entry into the primary market if that company had withdrawn shares from the market at least for a span of 12 months.
- Making the process of book building more effective as well as making the book builders more efficient.