Primary market crisis in India: a lesson for emerging markets

Abstract

This paper empirically investigates into post-reform aftermarket behavior of 3047 initial public offerings (lPOs) listed in the Stock Exchange Limited, Mumbai (Bombay). The period of study ranges from 12 June 1992 through 11 June 1997. During 1991, Indian economy faced macro-economic crisis and had to ask for financial support to the World Bank (IBRD) and International Monetary Fund (IMF). IMF and IBRD prescribe or impose uniform conditionalities on all under developed countries (UUCs) without considering their specific problems. Similarly, New Economic Policy (NEP) was forced upon India to meet international standards, liberalize financial markets and eliminate entry restrictions. The Securities and Exchange Board of India (SEBl) became statutarily effective from 12 June 1992 without proper regulatory framework in place and the Controller of Capital Issues (CCI) was abolished. The free pricing regime of the SEBI immediately after the highly controlled marker of the CCT has led to disproportionate growth of investment bankers that resulted into their poor bargaining power over the issuers and weak due diligence. As a result, overpricing of IPOs took place even before the offer of the IPO. Prohibitively initial excess return, low liquidity, excess volatility and high vanishing rate of IPOs from the market even within very few days of trading provide evidences of "overpricing". Such lax in regulatory mechanism leads to market failure with "lemon'' issues dominating the market and investor protection receiving the least possible importance. Unethical practices became the rule of the market with scams in secondary market, primary market, debt market, and mutual funds Thousands of crores of rupees of capital evaporated due to regulatory failure that has led to primary market crisis. Investors' confidence almost reached no return point with present regulatory system even after many measures taken by the SEBI and the Government. Primary market crisis has triggered the industrial slow-down, capital market sluggishness and economic down-turn for last three years Immediate reforming the legal and judiciary system seems to be the only option left It appears that the prescription or imposition of NEP was the only role of both IBRD and IMF. If, their objectives are prescriptive (for the cure of the Economy from sickness): then there should have been regular monitoring from the very beginning. The lessons to emerging markets while going for any reform are I) strategic action should be taken throughout the process depending on the prevailing situation with adequate research and development, and II) necessary reform in legal and judiciary system is a necessary precondition for any structural adjustment.