Mumbai: The Rs1,529 crore initial public offering, or IPO, of Indiabulls Power Ltd, that closed last Thursday, was subscribed 22 times but demand from retail investors was not as heavy. The portion of the float reserved for them was subscribed 1.09 times.
Listen to V K Sharma, head of research at Anagram Stock Broking, talk about why retail subscriptions in recent IPOs have been low
The Indiabulls Power IPO was not an exception. Most of the primary issues that have hit the market in the past few months have witnessed a lukewarm response from retail investors even though institutions have been lapping them up.
“Retail investors typically invest when they see a series of IPOs being listed at premium but the recent issues are not being listed with reasonable gains,” said Prithvi Haldea, chairman and managing director of Prime Database, a Delhi-based primary market tracker. According to him, most retail investors who lost money when markets tumbled in 2008 are yet to see profits on their 2007 investments and are still not willing to take bets.
The pricing of issues is another deterrent.
“IPOs are now coming at exorbitant prices,” said V.K. Sharma, head of research, Anagram Stock Broking Ltd. “As the markets are quoting at prices lower than the 2007 and 2008 levels, many retail investors are preferring to buy shares at a fair valuation on the secondary market.”
Graphics: Ahmed Raza Khan / Mint
After reaching its lifetime high of 20,873.33 in January 2008, India’s benchmark equity index, the Sensex, started slipping as an unprecedented liquidity crunch gripped the global financial markets. The index lost nearly 60% to drop to 8,160.4 in March 2009 before the bulls returned to the market, riding on liquidity.
Since January, at least 14 companies have raised about Rs15,000 crore through IPOs and about 60 more are awaiting the regulator’s nod to raise about Rs50,000 crore.
While the primary market has revived, retail investor interest continues to be tepid. The Rs2,777.25 crore Oil India Ltd issue and the Rs6,038.55 crore IPO of NHPC Ltd saw their retail portions being subscribed 1.7 times and 3.8 times, respectively. The IPOs were subscribed 30 times and 24 times overall respectively.
NHPC listed at a 1.94% premium while Oil India shares recorded an 8.62% gain over the offer price of Rs1,050 on the first day. Shares of Pipavav Shipyard Ltd, which received a 2.89 times subscription from retail investors, listed at a 2.07% loss.
A Mint analysis of subscriptions to IPOs in the past three years suggests that retail subscription, which used to hover at 50-100 times in some issues in 2007 and 2008, has come down to one-three times this year, though they continue to be oversubscribed in their entirety.
During 2007, when the Sensex rose 47.15% to 20,286.99, 100 companies raised around Rs34,179.11 crore from the primary market. Even in 2008, when the markets fell 52.45%, at least 37 firms mopped up Rs16,904.42 crore through such issues with retail subscriptions of 50 times in many of them.
The Religare Enterprises Ltd and Everonn Education Ltd IPOs saw their retail portions being subscribed 93.5 and 123 times, respectively, in 2007. While Religare shares clocked a 182% gain over the offer price on listing day, Everonn listed with a 241.75% gain. Vishal Retail Ltd’s Rs110 crore IPO that received over 50 times subscription of the retail portion, saw a 179% gain on listing day in 2007.
In 2008, even relatively large IPOs such as Future Capital Holdings Ltd (Rs491.34 crore) and BGR Energy Systems Ltd (Rs438.53 crore) recorded 55 times and 47 times oversubscription, respectively, on their retail portions. These issues listed with gains of about 19% and 88%, respectively.
The Rs11,700 crore Reliance Power Ltd IPO, which was oversubscribed 61.52 times, got its retail portion subscribed 15 times. The firm allotted shares to 4.17 million retail investors, denied many others, but its Rs450 a piece share lost 17.22% on debut.
“Retail investors always look for quick gains,” said Amitabh Chakraborty, president, equity, Religare Securities Ltd. “IPOs are coming with an aggressive pricing now, while similar stocks are available on the secondary market with at least 25% discounts.”
According to Haldea of Prime Database, these are early days of revival in the IPO market and retail investors will start investing money after at least five issues are listed with a premium.
The low retail subscriptions are “definitely a serious indication. Going forward, pricing will be critical to ensure that there are enough takers and issues get listed with a fair premium,” said S. Subramanian, head, investment banking, Enam Securities Pvt. Ltd. “And, of course, we need to take care of all categories (of investors) including qualified institutional buyers (QIBs) and high networth individuals (HNIs).”
Typically, 30-35% of shares in an IPO are reserved for retail investors. A maximum of 50% of shares are allocated to QIBs and at least 15% is reserved for non-institutional investors, including HNIs.
Padam Jain, executive director, investment banking, Anand Rathi Financial Services Ltd, said institutions often decide to hold and look for better returns but retail investors “get jittery if the opening is not good”.
To be sure, the success of a public issue depends on the response from institutions and not retail investors. If the institutional portion is not fully subscribed, the issue has to be abandoned but if the allotment of retail investors isn’t picked up these shares can be apportioned to QIBs or HNIs.
A senior official with a leading registrar pointed out that pricing was more reasonable in the past. “Recent issues have been highly priced. Retail investors want to see some money on the table,” he said, explaining their reservations about primary issues. The official did not want to be named as his firm is associated with many of the recent IPOs.
Ashwin Ramarathinam contributed to this story.