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Smart Promoter or Smart Investor

Aug-16-2021Blog by – Mr. Keval Lakhani (Chartered Accountant - Research)Read Time: 2 Min.Word Count: 458
638 Smart Promoter or Smart Investor

The IPO market has been very active of late. While the spate of IPOs which has been ushered by hefty listing gains has been the case for some time now, the recent few IPO listings did not get listing gains as per the market expectations.  IPO participation has been extremely high with certain IPOs being oversubscribed nearly 300times on a total basis. So what does this oversubscription figure denote? It means that if the company is looking to raise Rs 1/- from the primary market, it has received bids worth a whopping Rs 300/-. Just keeping in mind the above example, one can imagine the level of participation in the IPO markets from the investors be it, Retail, HNI or Institutions. The IPO market has been as buoyant as it can in recent times.  

Companies approach the primary market in order to list themselves on the stock exchanges. However, there are two reasons as to why the company issues equity which could be New equity that is fresh capital being infused into the company by way of raising money from investors & the existing investors offloading their shares in the markets which are also known as Offer for Sale ( OFS ).  In the case of an OFS, the money raised through the IPO goes to the investors selling their stake & not to the company. 

Let`s have a look at the recent 10 to 15 IPOs where the oversubscription has been buoyant. In most cases, the component of OFS has been to the tune of 70-75%. In fact, in 3-4 IPOs we have seen that the entire listing has been an OFS, which means that not a single rupee has gone to the company directly from the investors and has been fetched by the existing investors who have sold their shares in the primary market.

This scenario leaves us with a very pertinent question or a thought to say, what are the current IPOs suggesting? Is it the promoter/ existing investor smart to encash on the current IPO boom or is it the fresh investors who are lapping the shares very quickly? Do the new investors see a road map ahead which the existing investors are not charting currently?   

These questions continue to remain a mystery; however as a prudent investor one should read into the DRHP before taking any IPO investment decision. One should try not to get swayed away by all the noise pertaining to an IPO & should conduct at least basic diligence before investing. It’s only for time to say whether some of these IPO’s will turn out to be Goldmines or landmines! 

Also Read: Initial Public Offerings - An Overview of IPO Rush Investment

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