In the film Gajni, Aamir Khan Suffered from a disease – SHORT TERM MEMORY LOSS. Many a times, I feel most of us suffer from this syndrome. You look at media, they highlight a matter till the time we are interested and once we start forgetting the same, the news shift its pages from front page to middle pages and then one day, it all together vanishes.
It is humans who are investors as well and investors also suffers from short term memory loss problem. They forget what their mistake last time and again they make the mistake which they earlier made and then looses the money.
Something similar is now happening in IPO market. IPO stands for Initial Public Offer. It is a process where the main owner of business or promoter dilutes his share and goes to the public at large to sell it. The buyers are institutions both domestic and foreign, High Net Worth Individuals and Retail investors. The seller appoints investment bankers so that they can market their issue and these investment bankers get good commissions to make sure that the people buy share through IPO route.
Now, Try and understand what happens.
- The seller is not interested whether you are getting a right product at a right price. He is interested only in selling his stake. He is not doing charity but business and hence would like to sell at high price only.
- IPOs comes only when the markets are doing well and sentiments are positive. In 2006-2007, markets were flooded with IPOs and in 2008, there were hardly any. Now once again IPO are back. Investors, especially retail investors, often invest when everyone would have the money and they think that they are left out and hence enter into the market by seeing others.
- Investor often thinks that it is good way to make QUICK money and gets attracted towards it. It is true that few of the companies who came up with an IPO have done well but it is not easy to pick the right ones. Do you remember Reliance Power IPO in Jan 2008. Those were crazy days and everyone thought that by investing Rs.25000, they will get Rs. 10000 in next 21 days. Thousands of investors are still wondering what happened to them. People who never looked beyond post office and Bank FDs went and bought Reliance Power. Now this is what we call HERD MENTALITY. Investors often become victim and they feel secured in following what others are doing.
Reliance Power Price Chart(Source: Economic Times)
Now, those days are back again in IPO, people are showing tremendous interest in IPOs once again. Career Point, Eros Entertainment etc were oversubscribed hugely. One should not just buy because everyone buying and buying for immediate Pop-Up gain could be risky. Moneycontrol.com has now come up with a new tab “IPO”; all business channels are talking about IPOs: FM radio are playing IPO ads. Well it is just suggesting that more and more people are interested in it. Coal India issue is on the cards and people are again showing tremendous interest. I am not commenting anything on that IPO and what return it may offer, all I am Saying that people are lining up once again . Just remember what happened with NHPC IPO, another PSU which came in August 2009 at a price of Rs.36 and that time markets were 15000. Today markets are 20000 and the company is trading at 32.
Often people say that we are safe as they are selling their application in GREY Market. But don’t forget R- Power. Brokers went broke and investors lost heavily.
Check – Mutual Fund NFO
Now Should you actually apply to an IPO or not?
Answer to this question is simple- USE common Sense.
- If you were to buy an item from market, you would like to buy the same at reasonable price and not at high price.
- You would not buy only because everyone else is buying
- If you really need to buy it but do not know about the item, you will take someone along with you whom you consider more Knowledgeable in that item. In this case, Hire a expert or invest through Mutual Fund who would know better than you.
Read – Best Mutual Fund SIP
Understand what you are buying
What people generally don’t understand when applying for IPO is that they are actually buying BUSINESS as someone wants to sell a part of his BUSINESS. So before investing in IPO, you should know one thing very clear that you should know that business. If you don’t know business, you should not invest. You must be sure that the business you are buying is a growing business and you would benefit being a partner to this business. Business investments should not be done for short term. Just don’t go by what other are doing, what advertisement are inviting you, use your common sense. It should not happen that you land up buying one of the most well advertised issues like Reliance Power(-42% even after considering Bonus), DLF(-30%) or Future Capital(-60%) which are still below their issue price.
Aam Aadmi Question – Mutual Fund Or Direct Equity
Few more Facts about Indian IPO
- SEBI hikes retail investor limit in IPO to Rs 2 Lakh
- Reliance Power IPO got 46 Lakh Application(Highest ever for any Indian IPO)
- Performance of IPOs in October 2010 – out of 13 IPO listings, 8 IPOs are in negative territory.
- Close to 40 IPOs are filed with SEBI in Last 2 Months
- 116 IPOs were listed in between August 2007 to August 2010 – 62% of these IPO are still under there sale price.
- BSE IPO Index(Ya there is a Index which tracks performance of IPOs) has given 14.5% return in last 1 year; in same period Sensex has given return of 19.5%
- In 1993-94 witnessed more than 600 IPO listings – most of the companies are no more there.
- 48% of the companies that were listed in 2000 are vanished.(90% of the IT companies that were listed in this period are delisted)
- More than 50% of the companies that were listed in between 1990 & 2000 are no more there.
Investor think that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium.
Don’t listen to us Just read what Mr Bhave(SEBI Chairman) is saying:
“In a bid to maximize return of promoters, investment bankers are not looking at the interests of investors. “
Someone again asked me what does IPO stands for, I quipped
“Its Probably Overpriced”.
Enjoyed reading this.Simple and Informative. Thanks
If you like this article, please share it with you friends so that we can save some more financial lives. 🙂
Thanks for the informative article. But please also reply to my simple query, i.e., if investor is offered a 5% guaranteed return on application money by the broker (Rs.4500/- against application money of Rs.98,000/- for Coal India issue) irrespective of share allotment or refund, then what should an investor do?
We Indian love this word “Guarantee” – simple question what will happen if he will say we wont pay this amount? What happened of so called “Guarantee”in case R-Power.
Dear Mr. Hemant,
What your comments suggests are known to everyone in general, however millions like me are incapable of judging the complications associated with the technicalities of the IPO/ FPO & are guided by the market rumors/ believes. We are not competent to judge the correctness of the issues being illiterate in financial terms.
Does anybody has any solutions to the ignorance of the people at large?
Solution is first you have to learn basic things – no one can ignore financial literacy.
Once you have basic knowledge hire some financial advisor.
R.P.P. INFRA PROJECTS LIMITED , IPO is open for subscription till 23rd. How could anybody assess the strength/ potential of the issue?
I don’t consider IPO as a good investment – this is very well visible in my above post.
We don’t track IPOs or direct equity.
I am your regular reader & your blog is really informative. I have 2 questions: What is book building in IPO and tell me what is ABSA.
Thanks for you kind words. You are among very few people who know importance of learning about money; maximum people just want to earn money. Book Building is a process used by companies raising capital through IPOs to support price and demand discovery. It is a method where bids are collected from investors at various prices, which are within the price band specified by the issuer. The issue price is determined after the bid closure based on the demand generated in the process. ASBA stands for “Applications Supported by Blocked Amount”. If you apply for an IPO through the ASBA route, the money needed to buy the shares will move out of your account only when you have been allotted shares. Until then, the amount will just be blocked in your bank account. The benefit of ASBA is that the amount blocked in your bank account keeps on earning the interest and you are free from hassles of refund process.
I am researching on retail investor protection in Primary market. can you guide me about the areas where he/she needs protection. Also can u point out some ipo irregularities
I don’t do deep research on direct equities – I think direct equity waste of time for retail investors.
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