Mundra Port & SEZ IPO

The Initial Public Offering (IPO) of the Mundra Port & SEZ Ltd, promoted by the Adani family, was wildly oversubscribed at 115 times. The port itself is located about 70 km from Bhuj in Gujarat and will handle 30 mt of cargo this year, and the funds are being raised to help Mundra set up cargo and coal terminals, besides infrastructure for the SEZ. It is the first port and SEZ company to be listed. Mundra Port is primarily engaged in providing bulk cargo services, container cargo, crude oil cargo and value-added port services, including railway services between Mundra Port and Adipur.

The Red Herring Prospectus for the IPO describes it thus, "In accordance with Rule 19 (2) (b) of the Securities Contract (Regulation) Rules, 1957 (“SCRR”), this being an Issue for less than 25% of the post–Issue capital, the Issue is being made through the 100% Book Building Process wherein at least 60% of the Net Issue will be allocated on a proportionate basis to Qualified Institutional Buyers (“QIBs”), out of which 5% shall be available for allocation on a proportionate basis to Mutual Funds only. The remainder shall be available for allocation on a proportionate basis to all QIBs, including Mutual Funds, subject to valid bids being received from them at or above the Issue Price. If at least 60% of the Net Issue cannot be allocated to QIBs, then the entire application money will be refunded forthwith. Further, up to 10% of the Net Issue will be available for allocation on a proportionate basis to Non-Institutional Bidders and up to 30% of the Net Issue will be available for allocation on a proportionate basis to Retail Individual Bidders."

The IPO had sought to raise about Rs 1770 crore ($446 mn), by selling 40.3 million shares at Rs 400 to Rs 440 apiece. The massive oversubscription meant that the investors bid for 4.6 billion shares by depositing $51 billion. The Qualified Institutional Buyers’ (QIB) portion was subscribed nearly 160 times while the High Net Individuals (HNI) portion has been subscribed 156 times, while the non-institutional segment was subscribed by nearly 11 times.

When the shares got listed on 27.11.2007, the performance was even more spectacular. The shares, which were initially priced at Rs 440 ($11.06) got listed at Rs 770 ($19.35), and touched 161.4% to Rs 1150 ($28.90) on the Bombay Stock Exchange. It reached Rs 962.90($24.20), up 119% on the National Stock Exchange. This spectacular listing was despite the benchmark Sensitive index going down 0.6% at 19,127.73 during the day and a trend of overall weakness in the markets. More than 14.8 million shares got traded during the day.

DSP Merrill Lynch & Co, Enam Securities, JM Financial Consultants, SBI Capital Markets and SSKI Corporate Finance arranged this share sale through 100% book building route. DSP Merrill Lynch, JM Financial Consultants and SSKI Corporate Finance were also the global coordinators for the IPO. But despite the presence of all these big names, this IPO has failed to garner a good deal for the promoter. The underwriters clearly failed to gauge the market sentiment and underpriced the offering, thereby causing considerable loss to the promoters. The share closed at Rs 885.65 at BSE on 29.11.2007, or slightly more than double the issue price. At this price, the lead managers failed to mobilize atleast an additional Rs 1770 Cr, which was left on the table free! In other words, the transaction was not an economically efficient one and resulted in considerable deadweight loss.

In any IPO, the company going public would seek to get the highest offer price so as to maximize the amount raised. The underwriters, while also seeking to maximize the amounts raised, are concerned with ensuring that they do not price it so high that the IPO is undersubscribed. There is a price determination problem. This is compounded by an inherent moral hazard problem, as the underwriters have an interest in pricing the offer at a not so high price, so that their favored clients (mainly QIBs) are rewarded when the shares get listed. These clients in turn return the favor by giving the underwriters lucrative investment banking business. Everybody - underwriters, their clients, and investors - are happy, leaving only the promoter hard done!

In the traditional book-building route for an IPO, the lead underwriter sets an initial filing price, then takes provisional orders from institutional investors that it uses to gauge demand. The filing price can be adjusted upward if demand is strong enough, but in general the offering price for a company going public is considerably below the market-clearing price. As a result, investors who are able to get in on an IPO have a very good chance of reaping some easy gains, thereby opening up the possibility for considerable fraud. In fact, IPOs, especially of the more well run and fundamentally strong companies, are very attractive to investors, in particular the institutional ones, due to the potential "first day pop" of instant bonanaza, arising from a higher listing price than the offer price.

As compared to the underwriter determining the rate, a better option is the Dutch auction , which leaves the price discovery role to the market. In this method, the price is essentially determined by the investors, who submit the highest price they're willing to pay and the number of shares they want at that price. The people who bid the highest (and, if they bid the same price, the earliest) gets allotted the shares in the descending order of the bids till all the shares are allotted. However, no matter what you bid, the price you pay is the lowest price that any investor who got shares bid.

There are also other methods of issuing an IPO. The hgh profile and highly successful, Google IPO of 2004 is the most famous example. The Google IPO was a "sealed-bid, uniform-price" auction. The bidders make their bids in sealed covers. The Google auction first eliminated all bids it considered "speculative" and then priced the IPO at or near the auction clearing price, the level at which there is enough demand to sell the shares. The valid bids were then arranged in the descending order of bid price and irrespective of the individual bid prices, the shares were allotted at the price at which the last share was bid or at which the market got cleared. In other words, to "win" shares, the bidder needed to bid below the speculative price and at or above the IPO price. A brief description of the other auction variants are outlined here.

Though there are some reservations, auctions are a superior way of pricing an IPO because no one gets shares on the basis of who they know, and because it ensures that the company going public isn't going to leave too much money on the table by going public at a lower price than the one the market was willing to pay. It eliminates the moral hazard problem and lets the market do the price discovery.