The Hype Around IPOs in India: A Closer Look
The Indian IPO market is buzzing with activity, with new public offerings being announced every day. While there’s nothing inherently wrong with this, it’s important to note the hype surrounding IPOs and the fact that most of them fail to perform well in the first six months. Many investors are swept up in the excitement, hoping to make quick profits, but often overlook the critical aspects of investing in IPOs.
Who Brings IPOs to Market?
IPOs are typically brought to market by those who have already invested in the company—promoters, private equity players, or strategic investors. These are experienced and savvy players who aim to maximize their own returns, not to offer stocks at discounted prices for others to profit. They are not indulging in charity; their goal is to sell their shares or raise money for the company at the highest possible valuation.
The Reality of IPO Pricing
The pricing of IPOs is usually set at a level that leaves little scope for short-term gains. While some IPOs may deliver immediate returns, the reality is that many do not. Investors who hope to buy shares during the IPO and sell them for a quick profit often find themselves stuck with underperforming stocks. The short-term gain strategy works occasionally, but more often than not, it results in losses or locked-in investments that fail to deliver.
The Risks of Leveraged Investments in IPOs
Some investors go to extremes by using leverage to invest in IPOs, borrowing large sums to maximize their allocation. For instance, an investor might use ₹1 lakh of their own funds and borrow ₹9 lakh to invest in the HNI category. If the IPO lists below its issue price, they not only incur losses on their investment but also have to bear the burden of interest payments on the borrowed amount. This strategy can backfire spectacularly, turning a quick-profit dream into a financial nightmare.
The Growing Influence of Big Funds
Even large funds with thousands of crores in assets have entered the IPO game. These funds often secure pre-IPO allotments with a lock-in period of six months to a year, aiming to sell the shares once the lock-in expires. This has turned the IPO market into a game of flipping, where collaboration between promoters, merchant bankers, and big funds creates a speculative environment rather than one focused on long-term value creation.
India’s IPO Boom in a Global Context
India accounts for roughly 4% of the world’s GDP, but the country’s IPO deal value makes up more than 10% of the global total. While this indicates a healthy pipeline of IPOs, it also highlights the overemphasis on IPO activity in India. The sheer volume of IPOs can make it challenging for retail investors to identify genuinely good opportunities amidst the noise.
Investors should approach IPOs with caution and thorough research, avoiding the herd mentality and quick-profit mindset. A more prudent strategy is to wait for the market to stabilize after the IPO. The first six months are often marked by flipping activity, as initial investors exit their positions. Once the stock finds its natural level, long-term investors can assess whether it aligns with their portfolio goals.
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