Mumbai: Investors who bought shares in initial public offerings (IPOs) and did not sell on the listing day have made losses as some 70% of these are trading below their offer price.

Of the 55 firms that listed on the stock exchanges between April 2010 and March 2011, shares of 37 companies are trading below their offer price with four trading sessions remaining in the fiscal year to 31 March.

This is even as the Bombay Stock Exchange (BSE) Sensex has risen from 17,527.77 points to 18,815.64 on 25 March, posting a gain of 7.35% in the year. The broader Nifty index on the National Stock Exchange has gained 7.72%. All Sensex stocks are part of Nifty.

Also See | IPO scoreboard (Graphic)

BSE’s IPO index, which measures returns on newly listed companies, has lost 14% during the year. The index tracks share prices of all newly listed firms with a free-float market capitalization greater than Rs100 crore from the third day of trading till two years from the date of listing.

A little less than 70% of the IPOs, or 36 of the 55 firms, traded at a premium to their issue prices on listing days. This means those investors who sold stocks on listing day have made money in most cases. Those who have been holding on to them are notionally in the red.

Most firms that floated IPOs during the fiscal are medium-sized and have been included on the BSE-500, an index of 500 listed firms with a market capitalization of Rs62.56 trillion— about 94% of the exchange’s total market capitalization. The index has risen from 6,919.55 points to 7,229.45, or 4.48%, so far in the fiscal, but most new shares have underperformed.

Merchant bankers blame it on IPO pricing.

“Most of the issues whose shares are trading in the negative zone were overpriced. The pricing was aggressive in accordance with the trading pattern of their listed peers," said an official at a large public sector lender-controlled investment bank, requesting anonymity. “When the market recovered its losses from the year’s lows, these companies failed to regain investors’ confidence."

The Sensex fell to a low of 16,022.5 on 25 May and hit its peak of 21,000 on 5 November.

The investment banker cautioned investors, saying they should be careful before investing money in public issues of companies that are not well known and should take into account the outlook of the concerned sectors.

Indian companies raised Rs32,302.38 crore through IPOs this fiscal, including state-owned Coal India Ltd that raised around Rs15,200 crore. As on 25 March, Coal India was trading with a gain of 45.9%.

The 37 companies whose shares are trading below their offer prices raised close to Rs14,200 crore from investors.

“Medium and small-cap companies have lower liquidity, which impacted their post-listing prices," said Prashant Shetty, managing director of investment bank IDFC-SSKI Securities Ltd. “Investors should look at the fundamentals of the companies and the sector they belong to before investing in an IPO."

The list of major losers includes Aster Silicates Ltd (loss of 79% from listing price), Tarapur Transformers Ltd (minus 68%), Goenka Diamond and Jewels Ltd (minus 57%), Orient Green Power Co. Ltd (minus 49.3%) and SKS Microfinance Ltd (minus 44%). Shares of state-owned SJVN Ltd and Punjab and Sind Bank, too, are trading 22.7% and 15.7%, respectively, below offer prices.

“I’ve found 70-80% IPOs being overpriced as these offerings are made when markets are buoyant, and it is possible for merchant bankers, who take a short-term view, to justify the high valuations," said Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher Pvt. Ltd. “Indian promoters also tend to be greedy and that is why you have overpricing."

Many IPOs do well on listing as there is huge interest from retail and high networth investors, but for long-term performance there has to be sustained buying from big fund houses, he said.

Everyone does not agree merchant bankers are to be blamed for the poor returns. “In many cases, the sectors in which the firms operate have fared poorly because of external issues," said Vinay Menon, managing director, equity capital markets, JP Morgan India Pvt. Ltd.

Graphic by Sandeep Bhatnagar/Mint