Investment in IPO : Good Or Bad? | How to invest in ipo in india

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Investment In IPO

First of all I would like to tell you what Investment Guru Benjamin Graham thought about Investment in IPO. In his famous book The Intelligent Investor, he has written, “our one recommendation is that all investors should be wary of new issues- which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased.

He has explained the reasons behind this as well in his book. But it is a well know fact that share market operates on mainly two emotions- fear and greed. Investment in IPO is not an exception either. It is a natural tendency among investors that they get excited by anything new which holds a promise to make easy money. This tendency explains the brouhaha over an Initial Public Offering or IPO.

But Past IPOs Has Made Their Investors Rich!

I will not deny this fact that IPOs of many companies like Reliance Industries, Infosys, HDFC Bank, TCS, Eicher Motors etc. had made their investors rich. But this is also true for a number of long term investors who found value in these and decided to invest in them at a later stage. At the same time, you will find many IPOs (investment in ipo) in which has destroyed the wealth of investors. So, an IPO is good when you make the right choice and remain invested for a longer period of time.

You can call this season the season of IPOs (investment in ipo) in India. A lot of companies have launched their IPOs and many others are in the pipeline. Only in the month of September 2017, 7 companies came with their IPOs. These companies are as follows:-
1) SBI Life Insurance
2) ICICI Lombard General Insurance
3) Capacite Infra
5) Dixon Technologies
6) Bharat Road Network
7) Pratap Snacks
These companies have raise about 16,000 crore rupees from primary market in September only. But if you see the whole year so far, in 2017 more than 25 IPOs have entered the fray. In totality, the IPO investors have put almost 30,000 crore rupees on stake in these.

Investors Are Showering Money Over The IPOs 

No doubt, most of the IPOs of 2017 have got a spectacular investors response. But it is also true that the retail investors is inclined towards listing gains while investing in IPO. So, it is sort of speculation and this speculation may not give you gain always. Benjamin Graham has defined IPOs in The Intelligent Investor as It’s Probably Overpriced, or Imaginary Profits Only. This is true to a large extent as the companies launch IPO not to make you rich but to raise money from you. And, the promoters and investment bankers would try to keep the valuation of company higher to raise as much money as they can. There is an old saying in corporate world. One should raise money when it is available rather than when it is needed. That’s why most companies bring their IPOs during bull markets.
And when the IPO is received well by investors, their purpose is served. In Indian primary market, we have seen many IPOs which has got overwhelming response. This year too many IPOs were subscribed exponentially. Some of those were as follows:-
1) Salasar Techno               273x
2) Avenue Supermarts        104x
3) RBL Bank                        70x
4) AU Small Finance             54x
5) Bombay Stock Exchange   51x
6) Endurance Technologies    44x

Also, some of the above mentioned companies has given their IPO buyers a handsome listing gains. For example Salasar Techno made a strong debut with 152% gain while Avenue Supermarts clocked a gain of 114%. A few others rose between 35 to 75%. But remember that no one can guarantee if the next IPO will be a blockbuster.

Big Names’ IPO Are No Guarantee Of Good Returns 

Not even a big name can assure you a handsome or decent return. Take the example of a big insurer ICICI Prudential Life Insurance. The share of this company was listed 1.5% less than its IPO price. Moreover, ICICI Prudential Life Insurance share was down 11% at the closing of the day. Similarly, L&T Infotech was listed at almost the issue price and even after 1 year of trade, it is still hovering in a narrow range. It has never crossed the issue price till yet. So whether your investment in IPO will bear fruit or not, the answer will depend on the choice you make.

You should also remember that if the investment in IPO is oversubscribed many times, the retail investors may not get shares at all. The company will allot shares to those who have made bid for maximum shares at maximum prices. And, for retail investors, the upper limit of investment in IPO is Rs. 2 lakh. So, there are high chances that in an oversubscribed IPO, you may get quite less share than your expectations.

So, Actually How Much Will You Gain From An IPO?

I will explain this with example of Salasar Techno. The IPO of this company was over subscribed 273 times. Retail quota was subscribed about 60 times. It means that if the company decided to give every retail investor some shares, the maximum one could get was 60th part of his investment. If one has invested 2 lakh, he would have got shares worth Rs. 3,300. On the listing day, he would have made the gains of Rs. 5,000 if all of the shares was sold. The Salasar Techno has made debut with almost 150% gains. But this 5,000 will be taxed in one’s hands as listing gains is considered short term capital gains. And, on short term gains the tax rate is 15%.

Then, Should I Avoid The IPO Bangwagon?

Before making an investment in IPO, try to find the answers of these questions:-

  1. Can the company provide me handsome listing gains?
  2. Am I ready to invest Rs. 2 lakh in each IPO (for maximum allocation)?
  3. What are the costs I will pay when I block the amount for 8-10 days?
  4. How much will I gain after paying short term capital gains tax?

After convincing yourself hundred per cent, you can go ahead with investment in IPO. But if you are thinking about long term, market experts advise to wait for 6-9 months before investing in a newly listed company. If you find the performance of the company satisfactory, you can invest in the same via secondary market. And, don’t feel bad about leaving the listing gains of 10-20%. Remember that you would have saved taxes as well if you remain invested for longer period of time.

I am of the opinion that small investors should avoid investment in IPO and find the good companies from already listed ones. It will prove a wealth creator for them.

And, if you want to start investing, I suggest you to start from mutual funds. For better understanding, read this. First Time Investor in Mutual Fund: Seven Guru Mantras

I hope that you reader will be now better informed to decide about Investment in IPO. If you come across any doubt or question, feel free to ask me. Happy investing.


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