The Bombay Stock Exchange (BSE) has launched a new index—BSE IPO index—to track primary market conditions. IPO is short for initial public offerings.
The index will measure growth in investor wealth for a period of two years after the listing of a firm. Historical data provided by the exchange shows that the index peaked at a level of 3,872 in early January and is currently at almost exactly half that level (1945).
While it’s true that the index can be used as a ready reckoner in assessing the performance of stocks that have listed recently, it must also be noted that the performance of these stocks is highly dependent on the state of the entire market. And so a cursory glance at a broad market index, such as the BSE 100, would also give a good sense of how recently listed stocks would be performing. It’s no wonder that the BSE IPO index and the BSE 100 index are seen moving in tandem in the chart alongside.
It’s interesting to note that the IPO index displays high beta, rising at a faster pace while the market’s rising and falling at a faster pace. The fall can almost single-handedly be explained by the high weightage of Reliance Power Ltd in the index, which fell sharply soon after its listing.
Graphics: Ahmed Raza Khan / Mint
And while the markets were rising, a large number of listings were from high beta sectors such as real estate. But the broad direction of the index is pretty much the same as the broad market and so it remains to be seen if BSE can capitalize on this new index through the launch of exchange-traded funds and derivatives.
The method BSE has adopted for the calculation of this index is such that a stock is included on the third day of its listing, and not at the price at which the stock was offered to the public. This has been done so that the index is tradeable. But as a result, it leaves out the listing gains of IPO firms and the full extent of growth in investor wealth is not captured.
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