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Maruti IPO Results

Maruti's Initial Public Offer (IPO) was a grand success. A look at how grand a success it was.

By Ananya Roy

Issue: Oversubscribed

Ten. It's a nice round number. For a multiplicative factor, especially so. And 10 is the number of times that Maruti Udyog Ltd's Initial Public Offer (IPO) was 'oversubscribed'. It has been so long that this word frontpaged Indian newspapers, that people may need to be refresher course on it.

What it means is simple. For each of the 72,243,300 equity shares that MUL put up for grabs (representing 25 per cent of the company's overall equity, a chunk that the Government is divesting) in this book building exercise, it received about 10 applications. So strong was the demand.

The applications were, in effect, bids for the shares, with a floor price of Rs 115 per share - indicating the least that MUL would sell each share for in case of weak demand. In the event, demand even beat the expectations of optimists. In all, the IPO mopped up Rs 8,300 crore - a record of sorts.

The Government gets about Rs 1,000 crore, once the shares are allotted. This is to be done in the ratio 60:25:15 to institutions, small retail investors and high net-worth individuals. Of course, since Japan's Suzuki owns a majority of the entire equity pie, and the Government still has a large stake, MUL does not have to contend with any new source of control.

That's not the interesting part. The interesting part is how the bidding went. News that the entire issue (the 72 million odd shares) had got 'oversubscribed' within the "first three hours" of the issue's opening had hit the market loud and clear on the very first day. So there was no question of subsequent applicants submitting bids of Rs 115 per share (unless they hoped for perfect mass collusion). This was an auction-type IPO, rather than first-come-first-serve (or draw of lots, as in the bad old days of CCI-fixed pricing). That is perhaps why even the first-in bids were above the floor price, with the early average bid (measured as 'mode' rather than 'mean') estimated at Rs 120 per share. The IPO stayed open for several more days, with the oversubscription count rising visibly each day. News of this rapidly rising count went far and wide, as the spin-doctors tom-tommed the IPO's grand success. Yet, at the end, the average bid was just Rs 125 - also the bid acceptance cut-off price, as the government has declared.

Interesting. So, what is it about investor behaviour that one can learn from the episode?

One, perhaps that retail investors are led largely by the signals sent by institutional investors. If the big guys were bidding Rs 125, as the word went around, why bid any higher? If 720 million bids land up mostly at Rs 125 odd, that could still get you the shares.

Or perhaps that Indian investors, living in a cosy world of collective perceptions, still haven't entered the era of ferociously competitive bidding. Conservative by instinct, they treat the floor price as a bona fide reference for 'fair price', and then bid a decent ten bucks more - in the collective hope that everyone thinks likewise. And once it's all in the box and the numbers are called, they're proved right - as they have been in this case.

Swell for investors. Tough luck for equity divestors. Especially since the secondary market prices in India are so much more responsive to shifts in demand. It will be fun to watch how the MUL scrip moves once it gets listed.

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