IPO – Imaginary Profits Only

It’s about Initial Public Offer or IPO which can also stand for

• Imaginary Profits Only, or
• It’s Probably Overpriced, or even
• Insiders’ Private Opportunity

No these are not mine, you can find them in Intelligent Investor by Benjamin Graham. Though I do believe these are better full forms of IPOs than Initial Public Offer.
Let me qualify I am not commenting about Indigo IPO but IPOs in general.
Here we go.
Let’s look at perspectives of different stakeholders in an IPO

1) Yeah I am the Promoter…B*@#h
If you own a company and want to raise capital for expansion or you want to cash out, then at what market situation you would like to sell out – No Brainer – At the time when markets are upbeat, as during upbeat markets investors tend to overlook company fundamentals and are willing to pay any price to participate in IPOs on expectation of listing gains.

The majority of IPOs get launched in upbeat markets, which results in their underperformance over time The chart below which compares BSE Sensex with BSE IPO Index.

Simply speaking Rs. 100 invested in S&P BSE IPO index has gone up to 278/- and in S&P BSE Sensex has gone up to Rs 416/- 

2) Merchant Bankers perspective…the high profile Dalal
Merchant Bankers or Investment Bankers are the one who advise on Issue Pricing and then underwrite IPOs on fees from the promoter. It doesn’t require a lot of thinking to figure out that fixing a higher price will favor both Promoters and Merchant Bankers – Promoters will get more for selling their stake and Merchant Banker will get higher fees.
Due to this tendency, it has been observed that extraordinary salesmanship goes into IPO promotion by the Merchant Bankers
Usha Narayan EX ED, SEBI some time ago warned bankers against ‘planting news articles’ and ‘making forward-looking statements’ in advertisements by companies coming out with IPOs
C B Bhave, ex-SEBI Chairman (as per leading National daily on 25th Sep, 2010) said ‘
In a bid to maximize returns to promoters, investment bankers are not looking at the interest of investors. You need to introspect whether it is healthy practice. If you keep Investors disappointed day in and day out, the cause of investors will only be a lip service.’

3) Media’s perspective – Bring it on baby…

At the time of any IPO specially when the market is upbeat, a lot of hype is generated around new issues by its Promoters & Merchant Bankers through media and publicity. All of Financial Media and their experts incessantly talk about upcoming issues. IPOs become very visible and this visibility creates an environment of “Not to miss Opportunity” for Investors.

4) Investor’s Perspective – the proverbial bakra
On one hand markets are upbeat, secondly there is a hype in media around IPOs, and thirdly some of Investor’s friends and relatives start bragging about handsome listing gains returns they have made in previous IPOs (not many people will be inclined to speak about the IPO’s where they have lost money)
All these things make the IPOs irresistible for the regular Investor. Investor Behavior post listing is something to think about. It is very common to see that Investors tend to sell the IPO shares where they make listing gains, but hold on to their allotments which open below the issue price, waiting for current price to scale back to issue price levels and as common sense says you don’t make money by removing your flowers and watering the weeds.

The Myth of Listing Gains
Listing Gains ≠ Returns to Investor
Investors tend to get lured by the outsized listing gains, but have a look at this illustration
Illustration
Calculation of Listing gains to Investor
No of Shares applied                                 300
No of times issue subscribed                     10
No of Shares allotted                                  30
Allotment Price                                           200
Listing Price                                                250
IPO Listing Gain (%age)                             25%
Investment Amount                                    60000
Actual Absolute Gain to investor               1500

Actual listing gain to the customer            2.50%

This is just an illustration reality is perhaps worse…no, you don’t believe me…can’t blame you when the trinity of Promoters/ Merchant Bankers / Media is against you

Let’s refresh our memories from not so distant past

Finally,

I am a firm believer in capital markets and without IPOs there won’t be any capital markets. But having said that as an investor I think IPOs are typically stacked up against lay investors. If you want to invest in any company, please do, but you can invest even post-IPO – think about it.
I would also like to close this by saying this is not a comment on any particular IPO but IPOs in general. Some of the IPOs can be and had been great value proposition – it’s the hype which scares me.

Sometimes I wonder – Investing in IPOs is like buying an AC on the hottest day of summer

Ashish
Trying to avoid being a proverbial bakra 🙂

@Kollectify