Price rigging hits small-sized IPOs

MUMBAI: The saying ���small is beautiful��� does not seem to hold true where initial public offerings are concerned. Edserv Softsystems has become the latest addition to the list of dismally-performing small-sized IPOs that hit the market over the past one year.

Market watchers say in majority of these cases, price manipulation is to blame for the dramatic fall in share prices within a couple of weeks of listing.

Most of the IPOs with an issue size of less than Rs 150 crore, are down between 70% and 95% from their peak prices. In quite a few cases, the stocks are down 75-85% from their issue prices. Market watchers say small-sized issues are favoured by market operators as it does not take a huge sum to corner the shares.

These operators ��� some of whom specialise in rigging public issues ���have set up off-shore entities, which fulfil the requirements for a ���foreign institutional investor��� status. The operators then buy into the IPOs through these ���FIIs���.
���A common factor in most of the small-sized IPOs that have fared miserably is that the QIB (qualified institutional buyer) portion of the issue is subscribed to by just a couple of entities,��� says a broker.

The QIB portion has to be fully subscribed, else the issue cannot go through. Once the company makes an announcement that the QIB portion is fully subscribed, retail investors and high net worth individuals (HNIs) start placing bids, secure in the hope that some big players are betting on the issue.

With little floating stock available, share prices surge on listing, and continue to rise for a few days. This, in turn, attracts more buyers to the counter. That is the time when operators start unloading their shares, causing a sudden collapse in the stock price.

Brokers say in many cases, a strong nexus exists between the merchant bankers and the operators. ���Promoters of small companies find it tough to raise money in depressed market conditions.

There have been cases where merchant bankers agree to mobilise the funds as required by the promoter, but price the issue much higher. The difference is usually shared by the merchant banker and the operator,��� said a broker.