IPO Pricing & Listing Gains

Initial Public Offering (IPO) is as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. For example, the recent Oil India IPO had both the above components. Subsequent issue of securities by an already listed company is referred to as Follow-on Public Offering (FPO). The IPO can be in the form of a fixed price option or in the form of a book building method. In India, currently the 'Book Building' pricing method is in vogue. This method provides an opportunity to the investors to decide a fair valuation of the issue through the 'Price Discovery mechanism'. In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.

There was a time when investors made a beeline for new issues for the sake of reaping decent 'listing gains'. After a lull in the IPO market due to the crash in secondary markets, the primary market is again buzzing with activity, with a large number of companies getting ready to tap the primary market through IPO's. But the poor post listing performance of a few prized IPO's (Adani Power & NHPC) has made the retail investors lose interest in the primary market. A retail investor refers to an investor who applies or bids for securities for a value up to Rs.1,00,000. For this reason the Oil India IPO received a less enthusiastic response from retail investors. However, qualified institutional buyers (QIBs), who invest with a long term perspective are quite bullish about the new issues hitting the markets. It seems there is ample liquidity to take care of the future IPO's getting a decent response from QIBs.

Small retail investors will have to be careful in choosing an IPO for investment, and not be guided by vested interests promoting the issues through media. Since most of the new issues are being priced aggressively, including the new issues by Public Sector companies, the chances for making listing gains are few. If one has to invest in a good IPO one should invest with a long term perspective and not merely for listing gains. SEBI has made rating of new issues an optional exercise, but a majority of the companies get their IPO's rated by rating agencies (CRISIL, ICRA, FITCH etc.). The grades assigned to companies are avilable on NSE's website. The highest rating is a 5-star rating. Amongst the recent IPO's, the issues of OIL India Ltd. and Mahindra Holidays and Resorts Limited have been awarded a 4-star rating by CRISIL & FITCH respectively. Before investing in any IPO, retail investors are advised to go through the Red herring prospestus (RHP) carefully, or seek the opinion of their Financial Advisor.