The IPO gamble: Why the odds seem stacked against investors

Public issues have delivered little while private equity players have used them to cash out and exit

- SWANAND KELKAR

Of the 275 initial public offers (IPOs) in India since the covid lockdown, 35% have delivered negative returns on their issue price. Compared to their listing price, which is the price at which shares start trading, almost half have delivered negative returns. About half underperformed the BSE 500 index's return in terms of gains on their issue price and 64% in terms of gains on their listing price. Only 36% of IPOs over the past five years have been a worthwhile investment.

Surprisingly, qualified institutional placements (QIPs) fared only marginally better. Of the 224 QIPs since the pandemic, only 99 have outperformed the BSE 500 index, giving these professional investors a success rate of 44%.

An analysis at this time is important as the IPO market is stirring again after a recent lull. Why the success rate of IPO investments is poor is not hard to figure. The transaction is lopsided; a deeply informed and highly motivated seller meets far less informed buyers. The seller is either the promoter of the company going public or an existing private equity investor who is privy to superior information about the company. The buyers, however, even if they are institutional investors, make their investment decisions on the basis of an hour-long presentation (or interaction) and a few ancillary checks with suppliers, customers or bankers at best.