The myth of “low pricing” of initial public offers (IPOs) is fading. No longer can investors calmly walk away with short-term gains, as a majority of the IPOs in 2009 have turned in below market returns.
Only two of the eight IPOs that listed on stock exchanges this year have outperformed the market benchmark BSE Sensex.
While four of them are trading below their listing price, the returns generated by the remaining two are significantly lower that what Sensex has generated in the same period.
It is not only the smaller companies that have not delivered investors expectations. Even large issues such as Adani Power and the government-owned NHPC have not been able to perform.
“This is primarily because of overpricing of issues by lead managers and promoters who have made good money at the cost of investors,” said the chief investment officer of a large fund house on conditions of anonymity. “Investors can give them the answer by not subscribing to them and that is what has happened to the retail category which has not seen much of subscription to the issues.”
The performance of IPOs in the current rising market scenario also puts a question mark on the concept of IPO grading which only takes view on company’s fundamentals and not its most critical aspect — pricing.
While five out of eight IPOs were assigned a grade of 3 (on a scale of 1-5) and above, only one out of these five is trading above its issue price.
On the other side, Edserv Softsystems that launched its IPO in February and got the lowest grade of 1 from the rating agency Care has generated a return of 111 per cent —23 percentage points higher than the Sensex return.
The secondary market has performed better with three out of four companies on the BSE 500 outperforming the Sensex since March.