ICICI Lombard General Insurance couldn’t assure its initial public offering (IPO) investors a good cover. The stock of the company witnessed a poor listing at Rs 651. That’s almost 2 percent less than the issue price of Rs 661.
The Rs 5,700 crore public issue of the company got a good response from the investors. It was overall subscribed three times. ICICI Lombard is the first general insurer of the country to be listed on stock exchanges. But, the disappointing listing of the company has once again raised the often asked question – Are IPOs good for small investors?
The father of value investing, Benjamin Graham, has described IPO, in his famous book ‘The Intelligent Investor’, as “it’s probably overpriced” and “imaginary profits only”. Why such euphoria still?
But Past IPOs Have Made Their Investors Rich!
I will not deny the fact that IPOs of many companies like Reliance Industries, Infosys, HDFC Bank, TCS, and Eicher Motors have made their investors rich. But, this is also true for a number of long-term investors who found value in these and decided stay in the game.
At the same time, you will find many IPOs which have destroyed investors. So, an IPO is good when you make the right choice and remain invested for a longer period.
You can call this season the season of IPOs in India. A lot of companies have launched their IPOs and many others are in the pipeline. Just in September, seven companies came with their IPOs.
These companies have raised around Rs 16,000 crore from primary markets in September only. So far in 2017, more than 25 IPOs have entered the fray to collect more than Rs 30,000 crore.
Investors Are Showering Money Over the IPOs
No doubt most of the IPOs this year have gotten a spectacular investor response. But, it is also true that retail investors are being lured into investing because of expected handsome listing gains. There is an old saying in the corporate world that 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 have gotten overwhelming response.
This year too, many IPOs were subscribed exponentially. Some of them were:
Also, some of the above mentioned companies has given their IPO buyers handsome listing gains. For example, Salasar Techno made a strong debut with 152 percent gain while Avenue Supermarts clocked a gain of 114 percent. A few others rose between 35 percent to 75 percent. However, remember that no one can guarantee if the next IPO will be a blockbuster.
Big Names Are No Guarantee of Good Returns
Even a big name can’t assure you a handsome or decent return on its IPO. ICICI Lombard is just an example.
Earlier in July 2016, L&T Infotech had a tepid listing. The stock, however, has given decent returns since then.
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 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 an IPO is Rs 2 lakh. So, there are high chances that in an oversubscribed IPO, you may get much less share than your expectation.
So, How Much Will You Actually 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 you invested Rs 2 lakh, you would get shares worth Rs 3,300.
On the listing day, you would have made the gain of Rs 5,000 if all of the shares were sold. Salasar Techno made a debut with almost 150 premium on listing. But remember that this Rs 5,000 will be taxed, as listing gain is considered short term capital gains. And, on short term gains the tax rate is 15 percent.
Then, Should I Avoid the IPO Bangwagon?
Before making an investment in an 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 bear when I block the amount for eight to 10 days?
4) How much will I gain after paying short term capital gains tax?
After convincing yourself fully, you can go ahead with the IPO offering. But, if you are thinking about long term, market experts advise to wait for six to nine months before investing in a newly-listed company.
If you find the performance of the company satisfactory, you can invest in the same via the secondary market. And, don’t feel bad about leaving the listing gains of 10 to 20 percent.
Remember that you would have saved taxes as well if you remain invested for a longer period.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)