What is your IPO strategy
Are you an investor who juggles money from one initial public offering (IPO) to another? Last week’s events in the IPO market might have left many of you puzzled.
Wockhardt Hospitals Ltd, despite reducing the price and increasing the time period of the IPO, has scrapped the IPO because it couldn’t raise the desired amount from the float. Emaar MGF Land Ltd, which initially planned to offer its shares in a price band of Rs610-690, brought it down to Rs530-630 in two tranches. Not only this, because of the lacklustre response, it extended the time period of the issue by three more days and then finally, on Friday, scrapped its $1.64 billion (Rs6,478 crore) initial sale of shares following poor investor demand.
It’s not the first time this has happened. In August, Puravankara Projects Ltd, another real estate company, had to reduce the price band by 20% from Rs500-525 to Rs400-450, and extend the issue by three days. In May 2006, Deccan Aviation Ltd, the low-cost airline carrier, had to reduce its price band from Rs150-175 to Rs146-175, and extend the IPO also by three days.
As an investor, you may have concerns over the issue of companies tending to overprice their share issue. From the issuer’s perspective, the timing of an IPO is very crucial and a lot depends on investor sentiments also. If investors are buying the shares in the secondary market (or buying existing listed shares), it’s an indication that there will be a lot of demand for an IPO. So any issue, which comes out during a bullish market sentiment, sails through easily.
But when times are bad, there is lack of appetite among investors to buy the existing listed shares—the sentiment spills over to the IPOs also. So, the merchant bankers, who help companies bring out the issue, have to ensure that the institutional investors for whom 60% of the shares are reserved, bid for the portion. And if institutional investors do not subscribe for this portion, then the IPO has to be cancelled and the money refunded to investors.
To avoid this situation, bankers usually lower the price of the IPO to make it more lucrative. As per the rules laid out by the stock market regulator, the Securities and Exchange Board of India, the price can be revised 20% upward or downward from the price band declared by the issuer earlier. If the price is revised, the issue period has to be extended by three more days.
“Over the past year, we saw a lot of IPOs which were overpriced, but the market was ready to accept the price levels at that time,” says R. Balakrishnan, executive director at Centrum Broking Pvt. Ltd. Balakrishnan says it’s a bad time for investors who invest in IPOs to earn returns on the listing day and sell the shares. The long-term investors can look at existing listed shares that may be available at a relatively cheaper price compared with the companies which are coming out with the IPO.
Finally, if at all you are still keen on investing in IPOs, it makes sense to bid for shares at the lower price band. Many IPOs, which have closed recently, issued shares to investors at the lower price band, thereby indicating that people are not willing to pay a higher price.
Wockhardt Hospitals Ltd, despite reducing the price and increasing the time period of the IPO, has scrapped the IPO because it couldn’t raise the desired amount from the float. Emaar MGF Land Ltd, which initially planned to offer its shares in a price band of Rs610-690, brought it down to Rs530-630 in two tranches. Not only this, because of the lacklustre response, it extended the time period of the issue by three more days and then finally, on Friday, scrapped its $1.64 billion (Rs6,478 crore) initial sale of shares following poor investor demand.
It’s not the first time this has happened. In August, Puravankara Projects Ltd, another real estate company, had to reduce the price band by 20% from Rs500-525 to Rs400-450, and extend the issue by three days. In May 2006, Deccan Aviation Ltd, the low-cost airline carrier, had to reduce its price band from Rs150-175 to Rs146-175, and extend the IPO also by three days.
As an investor, you may have concerns over the issue of companies tending to overprice their share issue. From the issuer’s perspective, the timing of an IPO is very crucial and a lot depends on investor sentiments also. If investors are buying the shares in the secondary market (or buying existing listed shares), it’s an indication that there will be a lot of demand for an IPO. So any issue, which comes out during a bullish market sentiment, sails through easily.
But when times are bad, there is lack of appetite among investors to buy the existing listed shares—the sentiment spills over to the IPOs also. So, the merchant bankers, who help companies bring out the issue, have to ensure that the institutional investors for whom 60% of the shares are reserved, bid for the portion. And if institutional investors do not subscribe for this portion, then the IPO has to be cancelled and the money refunded to investors.
To avoid this situation, bankers usually lower the price of the IPO to make it more lucrative. As per the rules laid out by the stock market regulator, the Securities and Exchange Board of India, the price can be revised 20% upward or downward from the price band declared by the issuer earlier. If the price is revised, the issue period has to be extended by three more days.
“Over the past year, we saw a lot of IPOs which were overpriced, but the market was ready to accept the price levels at that time,” says R. Balakrishnan, executive director at Centrum Broking Pvt. Ltd. Balakrishnan says it’s a bad time for investors who invest in IPOs to earn returns on the listing day and sell the shares. The long-term investors can look at existing listed shares that may be available at a relatively cheaper price compared with the companies which are coming out with the IPO.
Finally, if at all you are still keen on investing in IPOs, it makes sense to bid for shares at the lower price band. Many IPOs, which have closed recently, issued shares to investors at the lower price band, thereby indicating that people are not willing to pay a higher price.
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