Impact of stock market boom on IPO markets

Abstract

The period of 1999-2000 will go down in the history books as a period that brought the stock markets in limelight worldwide. Moreover, it was the invasion by IT firms that gained prominence on the stock markets. The Internet revolution in the business markets brought with it the changed business models and the new paradigm to trade online on the stock markets. The revolution paved its way through the secondary markets into the primary market. The IT stocks gained their unusual heights; the IT stock price rose pepping up the market sentiments with stock exchanges setting recordbreaking highs. BSE Sensex itself gained from 4000 in 1992 to 6150 in Feb 2000, which is still an all time high in more than 100 years of its existence. The markets were thronged by new IT firms (IPOs) that made promises to be delivered. It was a dream come true for the short-term investors but alas, for the long-term investors it was a nightmare. The so-called, IT boom' was short-lived. Many studies have been conducted to understand the market fundamentals that went wrong during the period. The studies that have been conducted on the US markets have talked about the firms having raised quick and easy money during the boom period. The same impression has been carried over to the Indian stock markets. The study in this paper focuses on providing empirical evidence to prove or disprove whether the Indian firms entered the stock markets via the IPO arena to make quick and easy money. At the same time, briefly explore how SEBI regulations laid down after 1994-95 bust have been helpful for the investors while they traded in the primary market during IT boom. The sample chosen for the firm includes all the IT IPOs raised during the boom period including the aftermath period, when there was an unusual surge of IT IPOs even after 6 months when the market went bust. The methodology adopted for carrying out the study includes carrying out a broad fundamental analysis by working on the accounting data - growth in sales, EBDIT and net profit - and on the financial ratios - Return on Equity (return on capital employed), EBDIT / sales (operational efficiency) and PE ratio (market valuation). This is supported by further analysis on the stock market data to find out the involvement of retail investors in the stock markets and also whether the firms that raised IPOs met the target EPS projections as promised in their prospectus. The results are interesting. The current study statistically proves that stock market booms do not always bring dubious IPO issues with it. Though there are a large number of firms who have not performed well to meet the market expectations and there are some which have gone into the oblivion, there are firms (15% to 25% of total number during 1999-00 boom period) who have outperformed the market exceedingly. There are an equally large number of firms who have exhibited efficient operations but have not garnered high profits and high market value. In short, there are firms that enter markets during boom period to perform and meet their commitments to the investors; they provide a high value to the customers. At the same time, the study suggests that retail investors follow herd mentality and flock all IPOs irrespective of the disclosures made by the firms. Since there are still a number of firms that enter market to make quick and easy money, SEBI need to protect these retail investors from such firms. It is suggested that just disclosure by firms floating IPOs is not sufficient, more strict regulations to prevent retail investors from loosing money need to be put in place.