IPO and Retail Investor

Close to 100 firms got listed this year and out of these around, 30% gave 100% premium to investors and an equal percentage meant loss for investors. Over all, we can say that year 2007 was a great year for investors and companies as well as Indian stock markets are ripe for IPOs and both of them are making huge money through primary source of capital.

According to an analysis carried out by business newspaper Mint, Mumbai based Orbit Corp Ltd topped the list of IPOs this year in terms of return and gave a whopping return of 645% on its offer price of 110Rs. One interesting point to note is that the share got listed at a discount of 18%.

What we stand to learn from this analysis is that investors should target stock markets to earn a smart return rather than putting their money in orthodox instruments like PPF and fixed deposits. More and more retail investors in the share market will make the Indian stock market robust and as the base of retail and individual investors increases, we can expect more discipline in the market. Even after such mammoth returns, retail or individuals control ~ 10% of the total stock market. Time and again, the watchdog SEBI comes out with stringent rules to protect the interest of small investors and also to increase transparency in market but still the participation of small investors has come down by ~ 1% point this year. With more and more funds being pumped in India, we need better monitoring and transparency so that another Ketan Parekh or Harshad Mehta can be ruled out. The fears of these two scams are still apparent and this can be substantiated by individual participants shying away from the share market. Couple of good steps is taken this year by SEBI to monitor the funds coming in like Participatory Notes and compulsory registration of foreign funds before investing in India.

Coming back to the IPO story, does this 645 % return means - had you invested Rs 1 lakh in IPO of Orbit Corp it would have become 6.45 Lakh. Technically speaking we can yes but practically speaking no. This is so because if we apply for shares in an IPO, the chances of getting allotment are very remote. The huge premium on listing is attracting lot of money in IPO due to which share are oversubscribed n no of times. This makes it a complete lottery and very often entire amount of IPO application is returned without any allotment. Even if the shares are allotted it is one or two lot and generally a lot consists of 15 shares. This is also one of the major reasons for retail investors moving away from primary market. SEBI has proposed few good steps which can turn to be a New Year gift for retail investors.

• Qualified Institutional Investors (QIB), as of now is required to give only 10% of the value of shares as margin money to apply for shares. Furthermore, 50% of the IPO amount is reserved for them. Since they are required to pay only 10%, as soon as the issue opens, it gets over subscribed as the margin money to be paid is too low as compared in case of retail investors who are required to pay entire 100%. As the issue gets oversubscribed on the day of opening due to this loophole, it lures retail investors to put in more and more money in the IPO.
• Currently, it takes 20-22 days for the company to get listed after the IPO offer. SEBI is in the process of speeding up the entire procedure and bring it down to 7 days. This will again attract more individuals to market as the fund which now gets blocked in IPO of one company for a month will be available in a week’s time for further application after implication of the new process.
• If you remember the follow on offer of ICICI bank this year, the retail investor were given a discount of 5% on issue price. ICICI became the first private listed entity to make this move in favor of retail investors. If grapevine is to be believed, SEBI is also considering a proposal of making a discount of 10% to retail investor mandatory for fund raising in primary market.

All said and done, we know that Indian share market tops the hot list of all the investors whether domestic or global but the smartness of Watch dog SEBI and fund raisers lies in passing on the premium benefit to retail domestic investors and increasing their involvement which at present is a meager 10%. With further liberalization and increased monitoring we can expect a better future for retailers in the market. Pulling down QIB on same platform as retailers is one of the major initiatives of the year which is proposed by SEBI. If all these proposals get through, there is no doubt that the participation of retail investors may see a rise in market.

The views expressed are personal and the aothor is a Chartered Accountant working with TATA Group.