IPO's and Listing

Updated: Feb 11, 2021

The stock markets are on a bull run for the past 10 months with little to no respect to the ground realities. Sensex had just touched the 50,000 mark on 21st December 2020 and since then have receded back to 48, XXX mark.

Additionally, another striking feature of the markets post-March 26th 2020 is that most of the IPO's witnessed at least 50% listing gains. A total of 16 companies came to IPO in the year 2020 and only 4 saw discounted listing. 4 companies doubled the investors' money. Other companies also witnessed 20% to 70% listing gains.

Also, another shocking fact is that most of the companies which have doubled investors' money are now trading close to their offer price. Isn't it shocking? Why these companies are trading at such levels post listing? What could be the issue?

It is observed that private companies generally receive bids in huge proportions. Upcoming IPO of Indigo Paints was subscribed 117.02 times. The retail category saw a subscription of 15.93 times, QIB 189.57 times and employee category of 2.5 times. It had a price band of Rs 1488 to Rs 1490 which is quite high given that it has only 4% or 5% share of the entire paints industry. Despite having a high price band, it saw a great subscription because of its "Grey Market Premium".

Grey Market Premium or simply called GPM refers to the price shares are traded before they get listed. The GPM of Indigo Paints is around Rs 800 which means that its Grey Market Price is Rs (1488 + 800) = Rs 2288.

Certain IPO's of governmental institutions which have the advantage of being a monopoly also do not enjoy such subscription rates and grey market premiums. IRFC enjoys a monopoly in its sector as there are no private railways in India and its price band is Rs 25 to Rs 26 and has witnessed a mere 3 times subscription.

The reason behind these abysmal subscription rates and grey market premiums could be due to anchor investors (QIB's). The only investor in government institutions is the Government of India and they don't try to inflate the price artificially by spending resources whereas private institutions generally inflate their perceived value using anchor investors as they would want to achieve a good return on their investment. Even the promoters (~owners) would offload a good number of shares by selling them to QIB's beforehand and profit during IPO. There is a condition laid down by SEBI which states that QIB's must hold their shares for a minimum of 30 days before they can sell their shares and hence they try to influence the IPO so that they can get good profit even after 30 days.

Nonetheless, I believe a company's strength does not lie in rising during the market's Bull Run but their ability to bounce back after a market crash or Bear Run.

Note: Any kind of investment is subject to market risk. Please read all investment-related documents carefully before investing.

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