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Once upon a time, investing in a ‘public issue’ was akin to winning a lottery.
There used to be a government body called “Controller of Capital Issues”
which laid down the pricing rules. Pricing was based on past performance
and the formula worked in favour of the investor. So much that companies
were reluctant to issue shares. And new companies with no track record, had
to issue shares at ‘par’. There used to be a smaller investor base, but most
public issues were very well received and the investor made tons of money.
Imagine if you had got 100 shares of Colgate (when the company went public
in 1978) at a princely sum of Rs.26 per share! If my memory serves me right,
you got this money back in the form of dividends in two or three years! And if
you did not sell them, you would be having a few thousand shares with you!
Freeing of controls has changed all that. From a
buyers’ market, the IPO bazaar has become a sellers’
market. Today, the promoter of a company is free to
price his share at whatever price he thinks he can get
away with. In the old days, investment bankers were
chosen on the basis of influence and perceived
distribution ability. Today, the banker who gets the
highest price for the issuer gets the mandate.
In this changed environment, innumerable analyses
have shown that by and large, it is a high risk game to
invest in IPO’s.
Once in a way, a PSU may offer a reasonable offer (Coal
India?) and the investor may make money. However, if
you look at three stages of an IPO, it is interesting:
1) The first stage is the “Issue Price” or the price at which shares are issued;
2) The second stage is the “listing price” or the price at which it trades on
the first day; and
3) The third stage – the price of the share, say, a year after listing.
In today’s free markets, the IPO is a test of nerves between the buyer and the
seller. The seller (issuer) has the upper hand, since he decides the time and
price. The buyer has to bet on the possibility of finding other buyers at a still
higher price.
The IPO market is made very interesting by the grey market that supposedly
operates. In the grey market, people buy (if he thinks the issue is
underpriced) or sell (if they feel the issue is overpriced) before the issue is
done. The result of this is that the first stage price is generally a fixed one, and
the volume of business on day one sometimes reaches or crosses the total
issue size! Generally, a high level of oversubscription results in a listing
‘premium’ or upside.
As an investor, one has two choices to play the IPO game. One is in the ‘small’
investor category (where the limit is now going to two lakh rupees) where
you put in your money, wait for part allotment and part refund. Here, you do
not suffer any real interest outgo on the refund amount, so you think of even
a rupee gain as a profit. The second investor is the “Non-Institutional” or
High Networth Individual. He typically is leveraged anything from five to
thirty times and pays interest on his borrowings. He has to realise a minimum
upside to even get a break-even. For example, he may put in a crore of rupees
and put in an application for twenty crores! Nineteen crores is lent to him for
twelve to fourteen days (issue closing date to listing date) by a friendly NBFC
at an interest of, say, twelve percent per annum. And his final allotment may
be just around Rs.50 lakh of shares! So, he has to get a
minimum listing upside to cover his interest on the
nineteen crore! Generally, in a ‘hot’ IPO, the listing
price definitely is made to cross this hurdle rate, to
ensure that the HNI makes some money.
I have deliberately kept the institutional investor to
the end. He is the balancer. Some of them are in
cahoots with the financier/investment banker /
promoter and act accordingly. Some may participate
only at the issue stage. Some may come in at the listing
stage.
If any return is to be made on an IPO, it is generally on
the first few days of listing. Statistically, it is best to flip
the IPO on the first or second day and move on to the
next IPO. Coal India is a rarity and not the rule. Given its size and its near
certainty of being included in major local and global indices, the secondary
market price would not be based on fundamentals. Perhaps the best is
already over for the stock. Any number of analyses is there in the market
place which shows that holding on to a share got in an IPO for a long period is
a losing proposition. From an investment point of view, the secondary
market offers a better range. You buy after knowing the company. In an IPO,
no one generally knows the company, since the documents are generally not
read by anyone.
So, have fun in a bull market. Leverage in to the IPO’s and make quick money.
However, when the market turns, be prepared for a hit. Do not forget
Reliance Power, where virtually all investors lost money.
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