Investing in IPO (Initial Public Offering)
It’s the IPO season with the big guns from the Public Sector making their presence felt in the stock markets, starting with the listing of Coal India, Manganese Ore India and the Follow on offers of Power Grid and SCIL.
SEBI has been encouraging retail investment in the primary market. It extended the bid period for retail investors by one day than the institutional investors. The general premise being that the nature of the uptake by Institutional Investors and the number of times the IPO is oversubscribed will give the retail investor some comfort and confidence. Alongside in a recent directive SEBI has also increased the limit for retail investors to Rs. 2 Lakhs from the erstwhile Rs. 1 Lakh. All this to attract retail investors into the primary market. While there is ongoing effort to encourage retail participation, IPO investing could be a risky proposition for a retail investor.
As a general principle in any equity investment, belief in the strong company fundamentals should be the primary investment reason. The benefit of any equity investment is seen only in the long term. Apart from the PSU offers, investing in other Company IPO’s requires the investor to understand the fundamentals of the company, fair valuations, future growth prospects all of which are beyond the understanding of a common investor. Hence as a general principle if you are looking at long term investing, if you are not sure of the company fundamentals, stay away from IPOs. Typically invest in the stocks of companies which have been existent for a longer period, typically a decade or so. This should give you some confidence that the promoters have an understanding of the business.
But if you strong-willed and risk taking are looking to make a quick gain the primary market does offer some good opportunities. And with the current government disinvestment program there is definitely an opportunity to make a quick buck. For e.g. Coal India got off to a stellar beginning, listing on the bourses at a handsome premium zooming 32% over its IPO issue price of Rs. 245 per share in the very first hour of trade at the Bombay Stock exchange.
This quick gain is classified as listing gains. An IPO is generally priced at lower than its fair value and typically when it lists in the market; it will list closer to its fair value. The difference between the bid price and the listing price is known as the listing gains. Also, with the SEBI directive offering the listing to retail investors at a 5% discount there is an opportunity to make a 5% gain straight from the listing price and this comes to you in about less than a month. But note this may not be the case always and there is a some risk of capital erosion in every equity investment.
Applications Supported by Blocked Amount (ASBA)
One of the flip sides of investing in an IPO earlier was that a large chunk of money is usually blocked for a period of nearly a fortnight (the time between the bid and listing). And if the amount you have bid for is small and the IPO has been over subscribed chances are that you may not be allotted a single share and the refund process will mean that you would have lost investment opportunities in the interim. This is now eliminated through the ASBA facility. ASBA means Applications Supported by Blocked Amount. SEBI has tied up with various banks to offer this facility.
The objective of introducing ASBA is to ensure that the investor’s funds leave his bank account only upon allocation of shares. ASBA was introduced by SEBI in July 2008 but it is not yet known to many. How this works is, an amount equivalent to the bid amount is blocked by your bank towards subscription of the IPO but not debited. This means that your money continues to earn the interest in the savings account and is calculated as a part of your quarterly average balances by the bank. Only the amount equivalent to the allotted amount gets debited once the shares are allotted to the investor. For more details on the ASBA process visit the SEBI website and refer to the FAQ section.
With IOCL in the news next to hit the IPO market soon, it is a merry time for IPO investors!