The past three months have seen a regulatory experiment of sorts in the Indian capital markets. The purpose was to bring back retail investors’ interest in initial public offers (IPOs). The experiment has already shown some signs of success.
The Securities and Exchange Board of India (SEBI) has allowed IPO-issuing companies to keep their issues open for retail investor for an extra day after the subscription period has been closed for larger and institutional investors. It seems to have worked, at least in case of Engineers India, SKS Microfinance, and Bajaj Corp.
The idea is very simple. Retail investors follow cues from institutional investors. If the big boys are showing interest in any particular issue, retail investors also invest in that issue. However, since institutions like to wait till the last moment before investing, IPO subscription remains muted until the last day.
Extending IPOs by a day solves this problem. If the issues get a good response from institutional investors, the news will be in papers next day and retail investors will still have a day to put in their money.
However, the apparent success of this move (even though the volume of evidence is quite small yet) raises some uncomfortable questions about retail investors’ behaviour in India. At the end of the day, this is essentially a micro-level attempt to manipulate retail investors, basically, a sort of a game between promoters and retail investors. Retail investors who are lured by these tricks are the ones, who are focused purely on getting out on day one, which is why they need to pre-judge the demand for the stock. And this cat and-mouse game is facilitated by a deeply-held ideological belief in India that by hook or by crook, retail investors must be made to invest in IPOs. As I have written earlier, we need to step back and re-examine this idea. IPOs are not inherently suitable for retail investors. If anything, IPOs have a higher degree of uncertainty and poorer quality of information. The whole idea is a mutated descendant of the old CCI days, when an IPO allotment was like picking a lottery ticket. Nowadays, you can be sure that as soon as a handful of issues list with good gains (a few have, recently), promoters will start pricing upcoming ones to the limit. All in all, IPOs are not a great investment option for retail investors, and it’s time we stop trying to manipulate them into investing.