What It Says About Future Equity Returns
Indian Economy & Market|April 2018

Whenever the secondary market booms, come the promoters of companies with their IPos, enthusiastically supported by pink papers. Investors are lured in such a way with the euphoric feelings and intense excitement that, even after having burnt their fingers in the past, still they come again believing the party will continue ad infinitum.

Krishna Kumar Mishra

One of the first IPO boom recorded in the history of the stock market was in USA, way back in 1825.

Anecdotal evidence suggests that a man had been squeezed to death in the stampede to buy shares in the new Bank of Southwark. The higher mortals hired thugs to punch their way to the front of the line. All this ordeal suffered only to see the value of the shares purchased losing roughly by a quarter of their value in next few years.

Extraordinary Year for Primary Market

The current mad rush for IPO in Indian market and especially in last one month of FY18 is nowhere near to above incidence nor it is comparable, however, the result is likely to remain the same. Many of the current issues are likely to lose some part of their value in coming years. This is even visible now when 5 out of 8 issues hitting in the month of March are trading below their issue price. When we extend this for the entire FY18, the picture does not get very rosy. Out of 37 companies getting listed in NSE in FY18, 16 companies have given a negative return compared to its issue price. This is against the backdrop that broader and Frontline equity indices have given a return of 15% and 12%, respectively (See table: Performance of IPOs of FY18).

Coming back to a number of IPOs in FY18. month-wise analysis of data shows that last month of FY18 remained fairly active and every week two issues hit the primary market raising to the tune of almost `15000 crore. The reason for such hyperactivity was because month of February remained quite subdued in terms of IPOs and implementation of long term capital gain tax from FY19 (for detail see the box: Reasons for higher IPOs).

This has also made FY18 as the best year for IPO interms of raising funds. Data since financial year ending 1990, shows that the total amount raised during FY18 through IPO remains highest ever. The total amount raised in FY18 is `82109 crore and total number of issues hit the market is 45. To get a better perspective of the amount raised through IPO a simple churning of the data is enough. The result indicates that the amount raised in FY18 is almost 40% higher than the sum of all the amount raised through IPOs between FY12-17.

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