Who would have thought that in a year where economic activity in the country is witnessing a definite slowdown, initial public offerings or IPOs by corporate India are bringing in record subscriptions?
So far this year, there have been 41 equity IPOs. The largest of the lot was Zomato whose Rs 9,375 crore IPO was oversubscribed nearly 40 times. The train is not stopping with roughly 7-8 IPOs in this month too.
Are you thinking of getting on the IPO train too or did you do that already but are disappointed at receiving a paltry allotment?
Just remember, applying to an equity IPO is neither the first way to invest in a company nor the last. The benefits of investing either before or after the IPO may outweigh the inefficiencies inherent in an IPO for investing.
Drawbacks of investing in an IPO
Getting allotment in an oversubscribed IPO is extremely difficult. Investors chase IPOs that are popular and that leads to oversubscription. This chase means that investing in an IPO becomes more about perception rather than any fundamental logic.
For example, many individual investors who applied either through the retail or the HNI category for the Zomato IPO came out empty-handed thanks to the huge herd investment and oversubscription.
Moreover, the recent IPOs are priced and structured with the primary objective of giving a suitable exit to initial venture capital or private equity investors.
As such, pricing can be on the higher end of the range. There’s little room for substantial and sustainable gains post IPO.
Aside from the lack of allotment and extreme pricing, in chasing IPO investing one often forgets to check quality before making an application.
There is limited financial and fundamental information about the company which is going for an IPO. Investors should not get carried away in trying to invest in each issue that comes out.
Pre and post IPO options
Pre-IPO placement is essentially an opportunity to invest in the share of a company 12-18 months before the IPO happens. This is a private placement of shares between an existing investor and new investors.
If you invest in a pre-IPO opportunity, very often you will not be able to sell the share for a year post listing in the stock exchanges. Unlike a regular IPO, the minimum lot size is large and suitable only for HNIs and those who have an aggressive risk appetite.
The advantage is that, backed with some research, you can get fundamentally strong shares at a good price. NSE Ltd is one example of a pre-IPO opportunity. Here the price in the pre-IPO placement has moved from Rs 1700 per share (approximately) to quoting at around Rs 2300 currently. The company is yet to list via an IPO.
Investing in the pre-IPO period can help in maximizing capital gains from a fundamentally strong share listing.
If you are convinced about the fundamentals of a company and are unable to cough up the large sum required for the pre-IPO opportunity, you can always wait for the stock to list and then buy it.
You may not get the coveted listing day pop in price. But for a fundamentally high-quality company, your ideal holding period should be at least 5- 7 years anyway. In which case, missing that initial IPO listing gain should not be a big concern.
Investing post IPO, within a 3–6-month period, also gives you the advantage of adequate price discovery and subsequent quarterly financial disclosures.
Don’t fret or fixate on IPO investing, both pre and post IPO buying are perhaps more efficient for long term investors.
Keep in mind
You can even invest in pre-IPO opportunities through managed funds on the alternate investment fund (AIF) platform or through select mutual fund schemes. If you are not confident about your stock selection skills, these managed funds are the best way to be an early bird investor in a fundamentally good quality company.