The Indian IPO Market: Suggestions for Institutional Arrangements

In the companion paper on empirical regularities of India's IPO market, we found a high degree of underpricing. IPO underpricing is not healthy -- it involves penalising unlisted companies with a high cost of capital; this is unlikely to be a criterion along which the efficiency of resource allocation is maximised. In this paper, we propose four policy alternatives, which are primarily (though not exclusively) aimed at decreasing the extent of IPO underpricing: 1. We propose improvements to the quality of information disclosure at the time of a public issue. 2. We propose giving firms greater freedom to choose the offer price close to the issue date. 3. We propose an auction--based strategy for the primary market. 4. We offer a way to legitimise the gray market and bring it within the fold of the institutional framework governing financial markets of the country.