The CARE IPO pop and a new type of IPO lottery

by Manshu on December 28, 2012

in IPO/NFO

CARE listed a few days ago, and it was heartening to see that there was a listing pop, and the share did well to close at a 23% premium to its closing price or about Rs. 170 more than it’s offer price of Rs. 750.

The allotment on the CARE IPO was different from the others we have seen previously, and while a lot of retail investors didn’t get anything at all, people who got the allotment, got 20 shares regardless of how many they applied for.

So, you got 20 shares if you applied for 260 shares, and you got 20 shares if you applied for 40 shares.

This is an unusual situation, and it creates a system which leads to a very tempting type of speculation. What happened with the CARE IPO is that by applying for 40 shares, you blocked about Rs. 30,000 and when the shares listed you could have made about Rs. 3,400 by selling the IPO pop. This isn’t bad at all if you can spare that Rs. 30,000 for a couple of weeks or so, and Sunil Srinivasan pointed to me on Twitter that if you use ASBA, you continue to earn interest on that Rs. 30,000 as well.

In the past you have had to block a large amount of money to get the minimum subscription for popular IPOs but with this new method used by SEBI, you now have an incentive to actually apply for a smaller lot during the IPO and then sell it at the pop.

Of course the assumption is that you will have a pop and not have a Bharti Infratel type listing which listed down 13% today. Is it too hard to figure out which ones will be like CARE and which ones like Bharti Infratel? Hindsight is 20/20 of course, but during my reviews on the two IPOs I did mention that Bharti Infratel valuation seems to be on the higher side while CARE has priced its IPO reasonably and I certainly didn’t do any sophisticated analysis, so with the usual risk that goes along with speculation, I’d say  the current system will promote a new type of IPO speculation – bidding across accounts with small lots for certain IPOs and then selling the pop, which is a lot better than what people had to do earlier which was bid for huge lots and get only small amounts of stock.

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{ 2 comments… read them below or add one }

Karan Batra December 28, 2012 at 11:39 pm

This system of investing in an IPO and then selling on the day of listing is not good for the economy… such speculation should be discouraged and long term value investing should be encouraged…

I’m of a firm view that even if SEBI introduces a lock-in period of 1 month, many speculative investors will run away and the genuine investors will get the no. of shares which they bid for… The exisitn system is very bad for a genuine investor

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Manshu December 28, 2012 at 11:44 pm

I think they didn’t expect this to happen, but if they see this happening for 5 or 6 good IPOs they will revert back to the old system. I don’t like lock in periods because people should be allowed to speculate if that’s what they want but I feel that the older system discouraged that and though not ideal, it was better than this one.

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