IPO Revival Sans Retail Frenzy

After lying somnolent in 2008 and displaying some signs of life in 2009, the primary market has come into its own in 2010. Till October 2010, 55 initial public offers (IPOs) have this year cumulatively raised Rs 36,772 crore. This is almost 9 per cent more than the amount raised in 2007, which was supposedly one of the best years for IPOs: 103 new issues hit the market and raised close to Rs 33,782 crore, and that too without a blockbuster IPO like Reliance Power or Coal India.

But while companies may have successfully raised a lot of money from the primary market, has this revival of IPOs helped retail investors make money? If one looks at the performance of new issues, one finds that of the 34 issues that have been trading for more than a month, the average one-month return is 8.35 per cent. Around 44 per cent of these newly-listed stocks are trading below their listing price.

Compare this with the returns offered by the secondary market. Till date (October 28, 2010) this year the Nifty has given a return of 15.12 per cent. Only during January and May did the markets turn in negative returns. Which begs the question: are retail investors better off investing in IPOs? The market performance of these newly-listed stocks rather suggests that most issues are over-priced and the market is now punishing them for being steeply priced in the first place. However, Prithvi Haldea, chairman and managing director of Prime Database opines: “This notion of over-pricing is not right. If the price of a stock is not right investors should reject that offer. If that is not the case, then it implies that a set of investors thought during the subscription period that it was worthwhile investing in the stock and hence went ahead.”

IPOs are generally perceived as a vehicle for making a quick buck. Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities, agrees. “Most IPO investors are there for listing gains. These issues are a nightmare for long-term investors,” he says. Back in 2007, euphoria about market conditions was such that retail investors who were not allotted stocks during the IPO tried to make good by buying it as soon as it got listed. Their demand in turn drove prices of IPOs higher on listing. But 2008 taught retail investors that they were not the beneficiaries but in fact the drivers of the prices of these newly-listed stocks. This year, with the demand for newly-listed stocks missing, most stocks that have debuted recently are struggling in the secondary market. So far this year only in case of 22 per cent of issues was the retail quota over-subscribed more than 10 times. In case of 30 per cent of issues the retail quota wasn't even fully subscribed. This is in stark contrast to 2007 when in just 10 per cent of issues the retail quota wasn't fully subscribed. In as many as 40 per cent of issues the retail quota got oversubscribed more than 10 times.

Jagannadham points out the reason. “Euphoria marked the IPO boom of 2007 while scepticism marks the boom of 2010. While nobody felt that the market would fall in 2007, everybody feels that it will in 2010. From the psychological point of view, that probably is the main difference,” he says.

Hence, whether IPOs are being aggressively priced or whether it is a case of retail investors shunning IPOs after getting burnt in 2008, the bottomline remains that IPOs have lost the sheen they possessed in 2007. In our view, this is a step forward and points to greater maturity among retail investors. The latter should keep away from IPOs for the simple reason that far less information about the company's track record is available in case of IPOs than in the case of companies that have been trading in the secondary markets for years.

Regulatory push for IPOs
Recently the Securities and Exchange Board of India (SEBI) decided to increase the cap on individual retail investor's investment in an IPO from Rs 1 lakh to Rs 2 lakh. This points to the fact that Sebi is aware of retail investors' apathy towards IPOs and hence wants to tap into the existing investor base to make up for the shortfall. According to Jagannadham, “The number of demat accounts is not increasing in India. SEBI is aware of this fact, and is trying to tap existing investors for filling up the retail quota.” Haldea believes this is a retrogressive step that will push small investors to the sidelines by their richer counterparts.

What lies in store?
According to news reports, approximately 45 companies from both the public and the private sector have filed IPO papers with SEBI in the last three months. Haldea thinks the lukewarm retail response will keep bigger private-sector IPOs away from the primary market, but investors can look forward to disinvestment IPOs (like Coal India) that are attractively priced and offer a discount to retail investors.

The government has set its sights on raising $8.6 billion or Rs 40,000 crore this fiscal through disinvestment of PSUs. If market grapevine is to be believed, it is Hindustan Copper's turn next to hit the primary market, while ONGC and SAIL may tap it a second time (either via a follow-on offer or via a rights issue). Looks like it is only in the PSU IPO space that retail investors might strike good bargains.