IPOs don’t guarantee returns on listing day

The year 2007 witnessed 107 IPOs as against 92 in 2006. In 2008 , 150-175 IPOs are expected to come out.The FCH and Reliance IPO got 117 and 72 times oversubscribed. The retail investors were convinced that REL has the resources to execute the projects on time. But in India delays of 3 to 4 years are quite common (For eg Mumbai metro one of which RADAG is a partof is incharged of the Mumbai metro but hte project has still not seen light of the day)and hence some market analysts had advised not to invest in the Reliance IPO. Some retail investors actually sold some of their existing stocks and some even borrowed loans so that they would be able to invest in the IPO. What they dont realise in case the IPO gets oversubscribed(which was likely and it did) the lottery system comes into play.

Now there are 23 crores of shares out of which 30% are reserved for retail invstors .Now 5.1 million retail investors bid,let's assume, for 210 shares for Rs.450 each. So thats a bid of 10.5 crore equity shares for around 6.9 crore shares. Now if we use the lottery system and assuming that a minimum of 15 shares has to given each retail investor then 4.6 million investors will get get 15 shares each. While 0.5 million investors with land with nothing.Even if the shares list at a premium say at double the value around 900 the investors will make a profit of Rs.6750. That by any stretch of imagination is not big profit even for short-term or to take loans or sell existing stocks. So people take a chill pill!!

If you still need a reason not to go crazyon IPOs heres an article from TOI.

IPOs don’t guarantee returns on listing day

Investing in a public issue is not different from buying stocks. So, don’t get carried away by the euphoria in the market

Madhu T | TNN

Investors seem to be mesmerised by initial public offers from companies. Consider this: The initial public offer of Kishore Biyani-led Future Capital Holdings has received thumping response since day one. Its issue was subscribed 131 times by Friday evening. That means the issue has received bids for 84,14,51,848 equity shares as against 64.22 lakh shares on offer. Qualified institutional investors’ reserved portion subscribed 107 times followed by 27 times in retail and 33 times in HNIs category, according to sources. The price band for the IPO was between Rs 700-Rs 765, which analysts felt was on the higher side. Reliance Power IPO almost created a frenzy. From the moment the Anil Ambani-led company finalised its IPO, investor interest had been tremendous. There were stories of people selling their existing holding to participate in the issue. Some people were even ready to borrow to invest in the company. Suddenly, it seemed, everybody wanted at least one share of Reliance Power. No wonder, there were reports of the prices quoting at a premium in the grey market. As per last reports, the issue was subscribed 72 times, with retail investors subscribing 16 times.
What is happening? Why is everybody suddenly flocking to the IPO market? “Well, these two issues had strong promoters behind them. So, you can understand the mad rush to get a piece of action,’’ says an analyst. “However, even otherwise people tend to get carried away once the market is on a bull run. They would chase even obscure issues thinking that IPOs are sure way to make money.’’ That, he says, could prove a costly mistake. This is because IPO are not always supposed to list at a premium. Sure, you may have seen a host of IPOs listing at the stock exchange on a premium, but don’t consider it as a norm.
Don’t rush to fill in the application form for an IPO because suddenly everyone is talking about it. Spend a little time understanding the process, figure out the risk involved before signing on the dotted lines. A company enters the market with
an IPO when it needs money to fund an upcoming project. The company has two ways to fund the project. One, it can borrow from banks or financial institutions. Two, it can tap the market by offering a part of its equity. This has an advantage. The company doesn’t have to pay any interest otherwise it would have given to the bank. Instead it just needs to part with the profit to the investors.
This is exactly what makes IPOs risky. Fine, if they list on a premium and you get out immediately. What happens if you have to stay invested for a while to make money from them? The answer is simple: the company has to perform well. This means you should adopt all the precautions you would normally take while buying a stock in the secondary market. “People don’t realise it. But investing in an IPO is not very different from investing in a stock,’’ says a mutual fund manager. “Analysing a stock already listed in the market is easier because you already have its track record in public. Also, there will be a lot of research report and new available in the media, whereas you don’t have much information on a company entering the market with an IPO. You solely have to rely on the prospectus of the IPO,’’ he adds.
What makes the IPO game even murky is the last minute rush of dubious companies into the market after a prolonged bull run. It has been observed that many unscrupulous promoters enter the market to rob unsuspecting investors of their hard-earned money. “The recent issue of Future Capital and Reliance Power is a classic study. The issues received tremendous response from investors because two powerful promoters were backing these IPOs,’’ says the analyst. “But investors who fail to get allotment in such bumper IPOs often end up putting money in dubious ones, thinking they will make money from them, too.’’ Needless to say, it doesn’t happen always. On the other, they may actually lose money in the process. Remember that we have seen a bull run in the last four years and many dubious IPOs may be getting ready to hit the market. Stay away from them if you want to create wealth.