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Friday, 26 Nov 2021
A newsletter that demystifies complex economic jargon and explains how it impacts your everyday life
By Vivek Kaul

What Sholay, Harry Potter and Star Wars can teach us about Paytm’s post IPO flop show

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The only time I have spoken at a Ted X event was in early 2014 at the Indian Institute of Management in Indore. My 18-minute talk, which spilled into overtime, was rather quirkily tilted, the Ramesh Sippy syndrome – or why we don’t know which idea will work.

For those who don’t know their Hindi cinema, Ramesh Sippy is the director of Sholay, the biggest blockbuster in Hindi cinema.

When Sholay was first released in Mumbai with 40 prints on 15 August 1975, it was declared dead on arrival by many film critics. Anupama Chopra has the details in her book The Making of Sholay, and so does Diptakirti Chaudhuri in Written by Salim-Javed.


Writing in India Today, K.L. Amladi called it a “dead ember”. In the Filmfare magazine, Bikram Singh said: “Writers Salim and Javed churn out the rehash which needs a good memory more than imagination... The film remains imitation western—neither here nor there.” The trade magazine Film Information said: “The classes and families will find no reason for a repeat show”. Those were pre-TV days, and films made money when the audience went to the theatres to see the movie again.

Trade Guide, another magazine, referred to the film as ‘Chholay (chickpeas)’, insinuating that the return on investment on the movie was going to be very low.

The film critics were all outsiders. Even Sippy seemed to have lost faith in what he was making. Writer and film critic Mayank Shekhar in a 2014 column in the Open Magazine, had said that Sippy surrendered his financial stake in Sholay as the cost of production was going out of control. As Shekhar wrote: “He probably didn’t want to share the losses that seemed imminent.”

In fact, creators are so close to the product that they lose their sense of judgement. There is a little story in Stephen Alter’s book, Fantasies of a Bollywood Love Thief, which shows this rather well. Vishal Bhardwaj’s Omkara was about to release and Alter was talking to Abhishek Chaubey, who co-wrote the movie and was also its associate director. Alter asks him if he is happy with the film. To which Chaubey replies: “I’ve seen it so many times, I don’t know what to think.”

Getting back to Sholay. Of course, film critics and Sippy himself turned out to be wrong, and Sholay became a money-spinner. As Chaudhuri writes: “In its first run, Ramesh Sippy estimates Sholay made a staggering Rs 25 crore.” Also, it “made more than eight times the production cost—which was the highest ever at that time.”

How do things look once we adjust for inflation? As Chaudhuri writes: “As per economic estimates, inflation occurred eighteen times in the last four decades [Chaudhuri’s book was released in late 2015], which would put just the domestic gross collection of Sholay at Rs 450 crore. Till September 2015, only a handful of films— PK, Bajrangi Bhaijaan, Dhoom 3, Chennai Express have crossed Rs 400 crore globally.” And Sholay’s success was so big that it did that kind of business in India alone, in days of single-screen theatres and no multiplexes.

The point is that when it comes to cultural markets, it is very difficult to figure out in advance what will work and what won’t.

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Let me give a few more examples.

J.K. Rowling’s first Harry Potter book Harry Potter and the Philosopher’s Stone, was rejected by a dozen publishers until Bloomsbury agreed to publish it. The first print run was just 1,000 copies, of which 500 were distributed to libraries. Or take the case of Slumdog Millionaire, which almost did not release in the theatres and would have gone straight to DVD. Instead, the film won eight Oscars and also set the global box office on fire.

As Duncan J. Watts writes in his excellent book, Everything is Obvious Once You Know the Answer: “The history of cultural markets is crowded with examples of future blockbusters – Elvis, Star Wars, Seinfeld, Harry Potter, American Idol – that publishers and movie studios left for dead while simultaneously betting big on total failures.”

This story comes with a corollary. Once something unexpected becomes successful, people always seem to find reasons for it, albeit very general ones. Take the case of the South Korean singer Psy’s massive 2012 hit Gangnam Style. The song went viral, and then people started analysing its success.

A report suggested: “Its success occurs when the world is shifting in radical ways, at a time when individuals, empowered by the information technology, can change world history.”

This is an excellent example of what we can call a pseudo-profound statement. As Daniel Kahneman, Olivier Sibony, and Cass Sunstein write in Noise—A Flaw in Human Judgment: “Pseudo-profound statements [are] generated by assembling randomly selected nouns and verbs… into grammatically correct sentences, such as “Wholeness quiets infinite phenomena” or “Hidden meaning transforms unparalleled abstract beauty.””

Closer home, Dhanush’s Why this Kolaveri Di set music charts on fire in late 2011. The Indian Institute of Management at Ranchi organised a seminar to understand why the song had become such a rage. As a student told The Times of India: “The blend of two languages along with the funky music is what did wonders for the number.” Another article attributed the success of the song to the K.I.S.S (Keep it simple, silly) strategy.

These are as general as reasons can get. A bulk of Hindi film songs have very simple tunes and even simpler lyrics, but they don’t see the kind of success that Kolaveri Di did. I am sure the same is true for other languages as well.

The point is that after something has worked well or failed, for that matter, we can always find reasons for it. As Paul Ormerod explains in his book Positive Linking: “As usual, we could in principle always tell a story after the event which purports to the account for the much further greater popularity of one video compared to another.” Or, to put it simply and as the title of Watt’s book goes, everything is obvious once we know the answer.

There is a reason why this happens. As Michael J. Mauboussin writes in The Success Equation: “Our minds are experts at wiping out surprises and creating order.”

This is precisely what happened with Paytm once its stock was listed last Thursday, after its initial public offering (IPO). By the end of the day, the stock had fallen by 27% to Rs 1,564.2 from its issue price of Rs 2,150. On Monday, the stock fell a further 13% to close the day at Rs 1,360.3.

By then, the gloves were off, and analysts, investors and competitors, were offering all kinds of reasons for the stock’s post-listing flop show.

Let’s list a few here.

1) The major reason offered for the post-listing flop show is that the company’s business model is confusing, which it is. But it was confusing even before the company got listed, and it didn’t just start confusing people on Thursday morning.

The company’s details were available in its prospectus, which any company looking to come up with an IPO needs to file with the Securities and Exchange Board of India (Sebi), the stock market regulator. Given this, it’s difficult to figure out what exactly will be Paytm’s path towards profatibility.

In fact, even without skimming through the prospectus, anyone logging on to the company’s website or app could have concluded that the business model is all over the place.

Hence, those offering this reason now suffer from hindsight bias. (Lest I get accused of hindsight bias as well, I did make this point in a podcast a few days before the stock’s listing).

2) The fact that there wasn’t enough demand for the company’s IPO (or as we say in Mumbai, the response was thanda (cold)) was anyway clear from the subscription data available on the stock exchanges, almost on a real-time basis. When it comes to the non-institutional segment, which primarily consists of the high net worth individuals or essentially individual investors who bid for shares worth more than Rs 2 lakh in an IPO, the issue was subscribed just 0.24 times. Even the demand from institutional investors in comparison to other recent IPOs was rather subdued.

This, in a way, told us that the HNIs hadn’t bought into Paytm’s story like they had in the case of other unicorns like Zomato, Policybazaar and Nykaa. This was also a good enough indicator that there wouldn’t be any listing-day pop, as has been the case with other recent IPOs. When a stock is hugely oversubscribed, investors who do not get an allocation are likely to bid for the stock on listing and, in the process, drive up its price.

Take the case of Latent View Analytics whose IPO was oversubscribed 851 times in the non-institutional segment. When the stock was listed on Tuesday, it had a huge listing-day pop.

Nonetheless, as we shall see later in the piece, even an oversubscription doesn’t guarantee a listing-day pop. Oversubscription is a necessary condition for a listing-day pop and not a sufficient one.

3) Questions have been asked on how a loss-making company was allowed to list. Again, this is not an exception that was made specifically for Paytm, and several loss-making companies, including Zomato, have launched IPOs in the past. Of course, given that Zomato delivered a listing-day pop, the question wasn’t raised at all. In fact, loss-making companies are allowed to list as long as 75% of the IPO is allotted to institutional investors.

4) Investment bankers managing the issue have been blamed for bringing the issue at such a high valuation for a company that doesn’t make any money. There have been several such issues in the past and even this year. But no one complained then. Questions get asked only when the good time stops. Like no one blamed the investment bankers for under-pricing the Latent View Analytics IPO, given that it was oversubscribed so many times. The same was true for Zomato and Nykaa.

Also, it is worth remembering that investment bankers are batting for the company whose IPO they are managing and not for the investors who invest in these IPOs. Of course, on the flip side, Paytm’s post-listing troubles might make it difficult for future fintech IPOs to be expensively priced. As the Mint reported on Tuesday, the price of the unlisted shares of Mobikwik fell post-Paytm’s listing.

5) BharatPe’s founder Ashneer Grover said: “It’s the Chinese investors who sold their shares through this IPO.” When a company comes up with an IPO, it can use the money raised to carry out further expansion, pay off some debt or simply allow an exit to existing investors who had invested in the company before the company decided to go public and list on the stock exchange.

Of the Rs 18,300 crore raised by the company, Rs 10,000 crore was raised to allow an exit to existing investors, including the CEO Vijay Shekhar Sharma. In Paytm’s case, these investors happened to be Chinese. In other cases, they may be Japanese or Europeans or Americans, for that matter. As long as foreign investors are allowed to invest in start-ups, they need to be allowed to exit as well.

Also, the problem with bringing nationalism into the entire argument is that it raises the country risk for venture capitalists looking to bet on Indian start-ups. And that’s not a good thing for start-ups looking to raise money. It is worth remembering here that the risky business models of start-ups are not going to be financed by banks.

The Paytm-Reliance Power comparison

In fact, Paytm’s IPO flop show has been compared with that of the Reliance Power IPO, which in early 2008 raised Rs 11,563 crore. It was the biggest IPO the country had seen until then. It was sold at Rs 430 per share to retail investors and Rs 450 per share to non-retail investors. The stock listed at Rs 538 but fell immediately. It closed the day at Rs 372.50. As of 25 November, the stock was quoting at Rs 14.29.

Interestingly, the stock had been oversubscribed 72 times and still failed to generate a post-listing pop that retail investors love. In that sense, the Paytm-Reliance Power comparison isn’t a fair one. There are no guarantees in the stock market.

Lessons for retail investors

1) Easy money cannot be earned forever. The market will continue to go up because it has been going up, doesn’t always work.

2) Analysts in the business of managing OPM or other people’s money will always go with the herd. This is because they are in the business of drumming up money for investment, and their remuneration depends on it. Hence, before an IPO, very few will openly come out and suggest not to buy a stock, even when the stock is not worth buying, because there is too much at stake for them. The same is true for stock market influencers, who are paid by stock brokerages and rarely declare that.

Of course, when the stock falls, you will see them offering reasons for the same. Going with the herd makes sense for them. They are incentivised to do that.

3) When it comes to unicorn IPOs, as I had explained in detail in the previous issue of the newsletter, “there is no way of currently knowing whether these IPOs will end up being wealth generators in the long term.”

So, the only way to play this is to look at it as a punt and allocate small amounts towards buying such stocks and then holding them for the long-term and be okay with the idea of the investment coming a cropper. Hence, if you are the kind to whom the return of capital matters more than the return on capital, then unicorn IPOs shouldn’t be in your scheme of things.

4) If you have invested in Paytm and want to hold on for the long-term, do remember that the company will continue to require constant doses of capital. Also, it is worth remembering that the payments space, where Paytm first caught people’s imagination, is already very crowded, and there is the united payments interface (UPI) to contend with. On the positive side, the hope is that a bigger company will buy Paytm in the years to come.

5) In general, you don’t get wealthy by investing in an IPO and then selling out on a listing day. That’s just seeking excitement through investing.

In that sense, Paytm is like the products in cultural markets, which I talked about at the beginning of this newsletter, where it is very difficult to predict in advance if they will work. And that’s the long and the short of it.

PS: As of Thursday evening, Paytm’s stock price was at Rs 1,796.6, still below its issue price of Rs 2,150, but has recovered more than half of its post-listing fall.


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Written by Vivek Kaul. Edited by Saikat Chatterjee. Produced by Nirmalya Dutta. Send in your feedback to

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