Now I get it

by Manshu on December 14, 2009

in Opinion

A few years ago, before the IPO boom really started in India; most companies offered their shares at a discount on IPOs.  I remember the TCS IPO came out at a price range of Rs.775 to Rs.900, and even though it was over-subscribed many times over, the company decided to price it at Rs.850.

At that time I used to wonder why companies are leaving money on the table for investors, why aren’t they maximizing their proceeds, — it didn’t make any sense, and I just didn’t get it.

In the next few years, as the IPO market became hot, a lot of companies started to come out with their issues, and hardly anyone left anything on the table. They priced their issues to the maximum, and then some more. The frenzy was so intense that everything sold. No matter how crappy the company, if they came out with an offer – it sold.

Every IPO was fully priced, and I thought that companies had finally figured out they could make more money out of the IPOs than they were, and there was no need to offer a discount.

That part made sense, but what didn’t make sense was why people were still lining up to invest in these IPOs, — a lot of them had already burned their hands with issues that declined significantly, but there was still enough interest to ensure that every issue that came out got fully subscribed.

In the last couple of months or so, the interest of retail investors in IPOs has really dwindled, and gone are the days when anything and everything was over-subscribed a few times over. Investors have it figured out that if it is a good stock, they can easily buy it after it has listed (without having to block their money by applying for the IPO), and if it is a bad stock, then they can ignore it anyway.

Despite the lack of interest, companies are still pricing their issues fully, and not giving any sort of discount or leaving anything on the table for investors. I think that is about to change because of these three reasons:

  1. Retail investor interest in IPOs is dwindling fast
  2. Interest rates are about to rise
  3. Economy is slowly picking up

A combination of these three events will make it necessary for Indian companies to raise funds from the market, and a lot of times, it will not do to tap the debt market, — they will have to go to the equity market.

If they don’t get their act together, and start giving discounts and leave money on the table for retail investors, they won’t be able to raise money from the equity markets any more. So, in the time to come (I don’t know when), companies will start pricing their IPOs at a discount, and someone somewhere will be left wondering why these fools aren’t taking full advantage of the market. I won’t be that guy a second time though, because now I get it.

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