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Some uncomfortable questions about retail IPO investing

The last three months have seen a regulatory experiment of sorts in the Indian capital markets whose goal was to bring back the interest that retail investors had lost in IPOs.

india Updated: Aug 09, 2010 21:53 IST

The last three months have seen a regulatory experiment of sorts in the Indian capital markets whose goal was to bring back the interest that retail investors had lost in IPOs.

Over this limited time period, the experiment has shown some signs of success. SEBI has permitted IPOing companies to keep their issues open for retail investor for an extra day after they have closed for larger and institutional investors. It seems to have worked, at least for Engineers India, SKS Microfiance, and Bajaj Corp, all three IPOs where this was done. The idea is very simple. Retail investors follow what they believe are cues from institutional ones. If the big boys are rushing in to invest, then retail investors invest in an issue, otherwise they don't.

However, since institutions like to wait till the last moment before investing, IPOs' subscription numbers look quite impoverished till the day before the last day, which is the last stage about retail investors get any solid information.

Extending IPOs by a day solves this problem. Issues that get a good institutional response get oversubscribed, the news is in the papers the next day and retail investors still have a day to put in their money.

However, the apparent success of this measure (even though the volume of evidence is quite small yet) raises some uncomfortable questions about retail IPO investing in India. At the end of the day, this is essentially a micro-level attempt to manipulate retail investors' behaviour, basically a sort of a game between promoters and retail investors. Retail investors, who are lured by these tricks, are the ones who are focussed purely on getting out on day one, which is why they need to pre-judge the demand for the stock. And this cat-and-mouse game is facilitated by a deeply-held ideological belief in India that by hook or by crook, retail investors must be made to invest in IPOs.

We need to step back and re-examine this idea. There is nothing inherently suitable for retail investors in IPO investing. If anything, IPOs have a higher degree of uncertainty and poorer quality of information. The idea is a mutated descendant of the old CCI days when an IPO allotment was like picking a lottery ticket.

Nowadays, you can be sure that as soon as a handful of issues list with good gains (a few have, recently), promoters will start pricing upcoming ones to the limit. All in all, IPOs are not a great investment option for retail investors, and it's time we stop trying to manipulate them into investing.

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