IPOs: Avoid Them

It was wrongly rumoured that the IPO (initial public offering) market is dead. It is, indeed, dead for dud issues at any price and for good issues at fancy prices. The listing of MCX (Multi Commodity Exchange of India) proves that if the issuer decides to leave something on the table for the investor and has an interesting future, people are willing to put in money.

By and large, it pays not to subscribe to any IPO. The simple logic is that any promoter, who comes to the market, comes at his convenience and at his price. So, if the price is great for a seller, logic tells us that it cannot be great for the buyer. In this era of free pricing, promoters give the mandate to investment bankers solely on the price that the banker can promise to get. This is why most IPOs sink on listing and the investor is generally stuck with an expensive stock. Professional investors, who manage ‘other people’s money’, are able to bite the bullet and exit. Often, these fund managers have to oblige investment bankers or are given side-deals to subscribe to IPOs. So, we generally see the institutional category subscription being the saviour for IPOs in a weak market. However, today, there is increasing pressure and spotlight on fund managers; hence, they too are cautious about throwing money on dud issues. So, we have a weak IPO market.

The category of ‘HNI’ (high net worth individual) investors is, typically, leveraged investors who borrow from finance companies to invest in IPOs. They are aware that if an issue is subscribed 10 times, they will be allotted only one-tenth of their applications. The gains on this one-tenth have to cover the interest payout on the entire amount of borrowing which could be around 90%. Typically, finance companies look at the likely subscription and then stipulate a margin. If they expect 20 times subscription, they may keep the margin at 5%. In other words, they lend 95%. Interest for the allotment period (until recently, a maximum of 14 days) is charged upfront. And, on listing, the refund gets captured into a separate account. So, it’s zero-risk for them. The listed shares get allotted into a demat account which is controlled by finance companies. A retail investor can put in up to Rs2 lakh. An HNI can put in any amount.

Most Indian companies have overpriced their issues. The issues go through for reasons other than merit or fair pricing. Most of the issues are trading below their issue price. Many investors are still stuck in the ancient mould and apply for IPOs hoping to win the lottery of allotment. Yes, when the pricing was controlled by the government, you were virtually guaranteed a great return. In 1978 or so, Colgate India was compelled to issue shares to Indian public and the pricing fixed by the government was (I think) Rs26 per share of Rs10 face value! If you were lucky to get 100 shares of Colgate, your present holdings would be worth a few crores of rupees, taking into account the bonus and dividends. In the first year after the IPO itself, the dividend payout was over Rs10 per share. Many investors are stuck in that time warp.

Today, the pricing is so aggressive that most companies do not leave anything on the table for the investor. IPOs that come in with minimal dilution witness volumes only for a few days after listing. HNIs get rid of the stocks; institutions also do the same in most cases; it’s the retail guy who is caught in the crossfire. After some time, everyone loses interest in the stock, unless there is a great story. The price slowly crumbles. And, in the first few days, the volumes and price behave funnily as grey market operators square their bets by a continuous buying and selling.

The secondary markets offer a better pick for investors. The buyer gets to choose his time and price. Do not blindly invest in each and every IPO. There are more losers than winners out there.



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