With over more than Rs 11,000 crore being raised from the initial public offerings (IPOs) in the current year and a similar amount is to be raised from the public in the next half, it would seem that the IPO market has revived again.

In many ways it has, as there have large and prestigious issuances, like Mahindra Resorts and NHPC, hit the market and collected monies. Even the smaller and medium-sized ones like Adani Power and Pipavav Port have recorded smart subscriptions.

?All this sounds nice, but I have lost a huge amount of money in this IPO business. And if this is happening in the coming days, I would rather stay away,? says Sanjiv Guru, who burnt his fingers in the IPO game. And like Guru, there are others who have started expressing concern over the IPO opportunity. It all started with the much awaited Rs 6,000-crore mega NHPC issue, which after being over subscribed 23 times, gained just about Rs 0.70 on an issue price of Rs 36. It now trades at around Rs 34 levels. There are many others who have a similar story to tell.

?So should we just wait and pick the scrip from the market where we are guaranteed that we would receive the desired quantity from the secondary market?? is a valid question that Guru poses. But then Guru is an investor, who has started thinking like a speculator.

The difference

Parag Parikh, chairman, Parag Parikh Financal Advisory Services, a wealth management firm, and an author on several investment books shams the IPO market. He says, ?This entire IPO business is a non-workable deal.? He mentions that he does not encourage his clients to set aside funds for IPOs.

He reasons, ?First of all, IPOs are listed close to the market price and then they are sold by merchant bankers who get the mandate to sell the issue largely on their ability to get a strong valuation, this means that their job is to extract the maximum price from investors, so how can you get a good deal. It?s a behavioural anomaly.?

However, Prthvi Haldea of Prime Database, who has been tracking the IPO market over two decades reckons it?s a question of having the right frame of mind. According to him,

?There is a need to differentiate between speculation, gambling and investing. The people who bet on listing day gains are pure speculators. Some of them are gamblers that can even bet on it raining on a particular day. And then there are the investors.?

He then clarifies, ?Listing gains happen only when there is a frenzy in the market. At the moment the market is trending strongly and there is no frenzy, so listing gains would be hard to come by. Moreover, for long term investors, the price fall in the secondary market is an opportunity to buy more at a lower price in case they believe in the investment.?

And true enough, the listing gains have been in the range of 1% to 15%, when there are no losses on debut day. Earlier in 2007, listing gains were seen to be averaging 45% for IPOs. And that was the time when the secondary market was peaking every other day. So clearly, it is a question of having sorting out the expectations.

The speculative angle

?Now, speculation is not bad only if you are clear what the risks involved are. And there can be gains. One just needs to sort out the expectations,? says an investment advisor with a leading wealth management firm in India. Several wealth management firms have lined up monies for their clients to make most from the IPO game. However, many of them have been using the grey market to make these gains.

In case you fall in the high networth individual (HNI) category and have funds being allocated to the IPO market, then you need to be clear about how they have been utilised, say experts. Recently, in the NHPC issue, saw players in the HNI category lose out on money as the premium dropped substantially. Several were seen booking losses on the listing day in order to cover up for the funds borrowed to make most of the listing gains.

Also at the moment, there are institutions which also want to gain from listing opportunity have been dumping shares on listing day. For example, shares of Globus Spirits, settled at 10% discount after opening at over 11% premium on its debut day, saw around 77 bulk deals on the bourses. Central Bank of India (CBI) sold 1.99 lakh shares at Rs 105.27 a share and India Max Investment Fund sold maximum of 7.42 lakh shares at Rs 103.53 a share, and the offer price was Rs 100 per share. There were high bulk deals seen on the listing day for Jindal Cotek as well, however the share price manages to hold on steadily.

Moreover, in the days ahead, chances of listing day gains are expected to go down as the Securities & Exchange Board of India (Sebi) would be bringing in several changes that will allow mispricing of IPO to diminish. Prime amongst them would be reducing the number of days from the issue closing and the allotment and thereafter the listing of shares. Also, the regulator would be demanding extra portion of funds from qualified institutional buyers, as at the moment they have to tender only 10% of the shares applied for.

The bottomline, if you are in for listing gains, then better be aware of the risks involved. Experts also suggest the importance of linking gains to goals. Gaurav Mashruwala, a certified financial planner, tells, ?IPO investing is most ideal when it matches your portfolio goals.?

Similarly, Vikas Agnihotri, CEO, Religare Macquarie Private Wealth, reckons that investing in IPOs should depend on asset allocations. He says, ?We try to see as to how best does it fit into each portfolio.?

True sifting

However, there are sceptics that point out that out of the 38 issues that hit the market in calendar year 2008, only 12 have returned positive gains based on the current market price. In this context, a merchant banker points out, ?From the 2008 experience, we can see that of the 12 listed companies in 2008 that have seen positive gains till now, 10 had oversubscription rates in single digits. And companies like Future Capital and Reliance Power that were oversubscribed several times over have recorded phenomenal loss in price.

Rural Electrification Corporation, Alkali Metals and OnMobile are some of the companies that have done well in terms of returns. Only to show that sound pricing and business models would still work with the investing community and returns would be available.

Sudeep Bandhopadhyay, managing director with Reliance Money, says, ?Look at valuations as they are critical for better returns. We have seen the fate of many high-priced IPOs earlier. Also, investors should look for quality of management and the business outlook.?

Merchant bankers and promoters would always aim to get more for their offerings. However, with the passage of time, they would want to make issues attractive as well and would toe the line. Hence, being diligent about the pricing and other factors associated with investment seem to be the critical factors, but having an overall fit into the portfolio and planning scheme of things is even better.