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Commentary: India's Ip Os: All That Glitters Isn't A Jewel (Int'l Edition)


International -- Finance

Commentary: India's IPOs: All That Glitters Isn't a Jewel (int'l edition)

At 8 a.m. on a November morning, a select group of software entrepreneurs, attorneys, and accountants gather at Bombay's posh Taj Mahal Hotel for a breakfast meeting. They listen, rapt, as Patrick Sutch, Nasdaq's Asia-Pacific director, extolls the virtues of a U.S. listing for Indian companies. Not that they need much encouragement. "There is tremendous interest in a U.S. listing across the board--from software to pharmaceuticals to health-care to auto-parts companies," says Sutch.

The great American bull market has found a new, surprising source of high-flying initial public offerings. India, known for decades as a meandering Socialist economy, is suddenly producing a slew of winning stocks. Atop the list: Infosys Technologies Ltd., a software developer that listed on Nasdaq in March and gained $1 billion in market capitalization on its first trading day. It has now risen more than 15-fold, to $290 per share. Other Indian companies that have issued American depositary receipts include development bank ICICI Ltd. on the Big Board and Internet service provider Satyam Infoway Ltd. on Nasdaq. ICICI opened at $8 a share and is now trading at about $12. Satyam Infoway has fared better: It listed at $18 a share and has a $162 price tag. Thanks to aggressive recruiting, U.S. exchange officials expect another dozen issues next year.PACKAGING PLOY. But before U.S. investors--and Indian companies--get carried away, they should consider how potentially fragile this Indian boom is. While many hopefuls are legitimate proxies for India's talent and potential, others offer little more than slick packaging. Skeptics might argue that a lot of U.S. IPOs are just as flaky. True enough, but India just cannot afford a disastrous bubble that bursts and then sours investors on local equities for years. That would spoil the game for the genuine players, and deprive Indian industry of desperately needed funds. At the same time, U.S. exchanges risk damaging their own reputations if they allow subpar foreign firms to list.

India's managers, of course, deserve kudos for building companies good enough to capture U.S. investors' attention. Executives at the best have labored long and hard to come up with world-class products, adopt U.S.-style accounting, and develop a global presence. And New Delhi is at last cutting the red tape that used to half-strangle local companies. "Reforms are finally bearing fruit," says Vikram Goyal, regional economist at Morgan Stanley Dean Witter in Hong Kong, which promoted the issue of ICICI.

Already, some market participants are uneasy about the growing India-phoria. "People are being blindsided by Infosys' success," warns Rajeev Gupta, Internet analyst at Goldman, Sachs & Co. in Hong Kong.

Several obstacles lie in wait for the unwary. Even some inherently sound companies may be unable to deliver on their promises. For one, they are dependent on the country's creaking infrastructure. India, for instance, has just 20 million phone lines. By contrast, China adds 20 million a year. Internet-based companies--such as year-old Satyam Infoway, a $2.6 billion market-cap outfit that bills itself as India's America Online Inc.--are still dependent for Net access on the unreliable, state-owned telecom monopoly VSNL. Besides, most information-technology companies in India, including Infosys, still have to supply their own power.

Slick promotion might help to move shares initially, but it risks leading to disillusioned shareholders. ICICI says it's on the cutting edge and has sold itself as a "virtual universal bank." But analysts say it isn't as computerized as local retail rivals, never mind foreign players. What ICICI does have, however, is a pile of nonperforming assets.

Meanwhile, many Nasdaq wannabes are new tech ventures tied to old-line, slow-moving companies. Others, such as software producers HCL Technologies and Silverline Industries Ltd., are stuck in a web of cross-shareholdings that make their operations less than transparent to investors.

Top-notch Indian companies hoping to list in the U.S. figure the market will be discriminating. Let's hope so.By Manjeet Kripalani; Kripalani Covers Indian Finance and Business from Bombay.


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