Daybreak - In India’s IPO market, this small city in Gujarat calls the shots. Just look at Hyundai

Episode Date: November 4, 2024

Last month, India’s second largest automaker – Hyundai –  went public. But this was not your run of the mill IPO. This was widely speculated to be the largest public listing ever seen in the Indian stock market. So there was naturally a lot of hype around it. But on October 17, just hours before Hyundai’s public issue was set to close, most stock market circles across the country were stumped. There was a growing sense of disbelief. Panic even. Because only half of the nearly Rs 28,000 crore offer had been subscribed until then. This was a far cry from the 90 per cent threshold that had to be crossed. The IPO eventually had a pretty listless listing on October 22. Despite all that hype. Now naturally, that left a lot of people wondering what could have gone wrong? What prompted so many retail investors to keep away from the Hyundai IPO? Well, a lot of it had to do with what transpired in Rajkot in the run-up to issue. This isn’t just about Hyundai. This small city in Gujarat has a big role to play in India’s IPO market. Tune in. We are hosting our first live recording! If you are in your 20s, like to run or just enjoy meeting new people, sign up for The Ken X 56 Run Club. This is for our Bengaluru-based listeners only. 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Last month, India's second largest automaker went public.

I'm talking, of course, about Hyundai. Now, this was not your run of the Mill IPO. It was widely speculated to be the largest public listing, ever seen in the Indian stock market. So there was naturally a lot of hype around it. But cut to October 17th, just hours before Hyundai's public issue, was set to close.

Most stock market circles across the country was stumped. There was a growing sense of disbelief, panic even, because only half of the nearly 28,000 crore-rupy offer had been subscribed until then. This was a far cry from the 90% threshold that had to be crossed. The IPO eventually had a pretty listless listing on October 22nd, despite all that initial hype. Naturally, the whole situation left a lot of people wondering what could have gone wrong.

What prompted so many retail investors to keep away from the Hyundai IPO? Well, turns out, a lot of it had to do with what transpired in Rajkote in the run-up to the issue. This isn't just about Hyundai. This small city in Gujarat has a big role to play in. India's IPO market. Let me put it this way. Pretty much every IPO-bound company makes it a point to make a road through a pit stop in Rajgoat.

Now, there are two main reasons for this. The first is because of the sheer number of applications from retail investors that come from here. In this regard, the city punches far above its weight. In fact, when it comes to IPO participation, it outdoes most major cities, including the likes of New Delhi, Bangalore, Kolkata, Hyderabad and even Chennai, all of which, of course, have much larger populations than Rajkote. Now, the second reason the city has such a massive influence on the IPO process

is because it's the fountainhead of a key determinant of an IPO's fortunes. It's grey market premium or GMP. Rajkort has a big role to play here thanks to its deep broker network. Now, this is very often seen as the weather wane of investor sentiment in an IPO. It's essentially an indicator of the extra price speculators are willing to pay above the IPO price in unofficial markets. So while a tidy GMP invariably translates into strong IPO subscription numbers, a weak one scuttles investor participation.

But it's also important to note that it is neither always accurate nor entirely reliable. But it has become an indicator for IPO flippers. Now, these are the kinds of investors who buy shares only to sell them quickly and make listing gains. The GMP tells them if there is scope for a pop on listing, which would mean they could earn a neat profit if they sell these shares quickly. The flip side of this, however, is that a low GMP would make investors stay away from that issue. And in fact, that's exactly what happened with Hyundai. Now, the greatest grey market of the country exists in Rajkote. Its clout in the GMP market is exactly what feeds into its dominance in the IPO market.

But here's the thing about the GMP. market. It's unofficial, unregulated and largely runs on trust. It also doesn't help that most people consider it illegal. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Rahal Philippos, and I'll be joining my colleagues Nikta Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, the 5th of November. The Ken's finance editor, Anand Kalyan Raman, spoke to a bunch of local brokers in Rajkot after with the Hyundai IPO. He wanted to understand their perspective on things.

And well, one city broker said it was clear as early as the Hyundai India Roadshow. People just did not respond to it well. For starters, they said that Hyundai India got its pricing all wrong. They said that the IPO should have been priced between 1,600 and 1,800 rupees apiece as opposed to its issue price of 1960 rupees. They may be on to something because a week after listening. the share was only a tad above the level that Rajkote's brokers thought fit. Hyundai should have listened.

After all, this city has been in the IPO game for decades now, so they know what they're talking about. Sure, the IPO grey market doesn't just operate out of Rajkort. It operates out of other cities too, like Jaipur, Indoor, Mumbai and Ahmed. But the thing is, the players in other parts of the country are fewer and way smaller. And brokers say that because of the sheer numbers of the community and trades there, the prices will be the finest in Rajkort. While actual numbers are hard to come by,

one broker estimates that nearly two in five IPO grey market transactions happen in the city. Now, you're probably wondering how someone even transacts in the grey market. Well, to begin with, an investor must either be known to the broker or have a really strong referral. That's because the settlement of the trade is eventually done in cash. which requires a great deal of trust between the two parties. Trust is very important, especially considering that there is no legal recourse in case of a default.

In the grey market, bets aren't about the stocks themselves, but on the premium over the IPO price once the stock lists. For instance, a buyer may bet that a stock will list at 300 rupees premium on its IPO price of thousand rupees. Now, if it lists at 1,400 rupees, the buyer has paid the difference between the actual and the, estimated listing premiums in cash.

Similarly, if the stock were to list at, say, thousand rupees, the buyer would then have to cough up 200 rupees. Now, I'm sure it's clear by now that this IPO grey market operates in a, well, grey area. It isn't regulated and most brokers will admit that it is illegal. Trust is the most important factor. And that's exactly where Rajkot's massive network of brokers comes in. More on that in the next segment. I am interrupting this episode to make a very exciting announcement.

If you've been on social media since the beginning of this year, you may have noticed that run clubs are really having their moment. They are blowing up. Or should I say gaining pace across the country. And this resurgence of run clubs is largely being driven by young people, Gen Z's and late millennials. The best part is that most of these runners are first timers. So we were curious.

What is making hundreds of young people take to running? Are they all desperately seeking that runners high? Or is there something more to it? Well, to find out, Snigda and I will be joining the 56 Run Club here in Bangalore on Sunday morning. The best part is that you can join us too. We are organising our first ever live recording. So if you are in your 20s and would like to feature in an upcoming episode of Daybreak, sign up for the Sunday run. The sign-up link and the details of the run will be in the show notes of this episode.

The broker network in Rajkot is truly one of its kind. You see, brokers play an integral role even beyond the grey market. They advise investors on whether or not to apply for an issue and whether to hold on to it or sell on listing. Now, this broker network is so strong, it's even able to transmit all the details of an IPO within minutes of it being announced. And this is just a group of about 1,000 brokers and sub-brokers. But they have a client base of at least 15 million people.

It is a well-oil machine. As soon as an IPO is announced, they are able to share their recommendations with these investors who are located across Rajkort as well as the rest of Gujarat. Now, the system is hard to mimic anywhere else. And that's because of Rajkort's massive supply of stock-broking services. This is a city where IPOs are like a secondary business for multiple families. It's almost like a competitive sport. Generally, DMAT accounts are opened in the names of multiple family members

and IPO applications are made from all of these accounts to improve the odds of getting allotment. Just like that, about a quarter of Rajkot's families participate in IPOs, and most of them are in the flipping game. They are all eyeing listing gains from IPOs. They make their money quickly and then put the funds in other IPOs. The director of a Rajkote-based brokerage said that this was the culture there. Hardly anyone holds on to IPO stocks. But of course, we can't forget that this is a very risky game.

Allotments are rare, especially in highly popular issues. And there's always a chance that the issue could open at a discounted listing, no matter what the GMP indicates. But investors in Rajkort seem more than willing to take their chances. That's exactly why this city attracts any company looking to go public. In fact, one broker said Rajkot alone can put in enough applications to fill more mainboard IPOs at least once and SME IPOs 10 to 20 times or more. That is the city's capacity.

Coming back to what went wrong with Hyundai. Financiergeers, more than most others, keep a close eye on the potential gains and losses. And they saw only a meager profit or even a loss in Hyundai's IPO price, based on its GMP. Just a fortnight before the issue opened, Hyundai India's GMP began crashing from the highs of rupees 370 and even went negative on the day that the issue closed.

That is probably why retail investors would have stayed away. Especially if they were looking to flip their shares for listing gains. That seemed increasingly unlikely with Hyundai. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast. castras. Head to the ken.com and click on the red subscribe button on the top of the website.

Today's episode was hosted by Rahil Filippos and edited by Rajiv Sien.