Heavy subscription does not guarantee listing gains

A recent trend in the primary market offers a valuable lesson for traders, especially those who wish to bet on high subscription figures. With certain company IPOs being fully subscribed within minutes or hours, there arises a temptation for some to hastily join the fray in pursuit of substantial gains, either upon listing or immediately thereafter.

However, the recently listed five companies — Krystal Integrated Services, Popular Vehicles & Services, Gopal Snacks , JG Chemicals and RK Swamy — that saw a decent to strong interest from investors, especially retail, gave a warning to those investors.

For instance, JG Chemicals – whose IPO received a strong response of 28.52 times – tumbled 16.52 per cent on Day 1 of listing itself. In fact, the IPO attracted all category of investors with QIBs bidding 32.33 times, high net worth individuals (48 times) and retail investors (18 times). Against IPO price of ₹221, the stock closed on Day 1 at ₹184.80 and is yet to breach the IPO price.

Even the stock of RK Swamy, a composite company that goes beyond advertising in the marketing space, also suffered. The IPO was subscribed nealry 26 per cent but on the listing day the stock fell 8.6 per cent. Against IPO price of ₹288, the stock slipped ₹262.20 and tumbled to a low of ₹227.65 and is currently hovering around ₹275.

SEBI’s caution

One of the main reasons for the lacklustre performance of listed IPOs is the huge sell-off in mid- and small-cap stocks in the secondary market, after warnings by SEBI chief Madhabi Puri Buch. On the small- and mid-caps, Buch said the regulator had analysed the data and, in some cases, the “valuation parameters are off the charts and not supported by fundamentals and appears to be a case of irrational exuberance.”

However, SME-IPO market still looks vibrant both on subscription and performance metrics. Signoria Creation, which was subscribed 666 times, gained over 110 per cent on listing.

Desi bourses are global leader

A recent report by financial consultancy and advisory firm EY said that the Indian stock exchanges have emerged as global leaders in IPOs for 2023. India’s stock exchanges have secured the top position worldwide in terms of the number of IPOs, with no cross-border deals reported. Similarly, the Small and Medium Enterprises (SME) markets also showcased a remarkable growth, EY added.

However, though oversubscription of an IPO is a good sign of demand, the investment decision should not be based on that criteria alone. In bullish markets, IPOs often see robust demand. In certain instances, operators subscribe to these issues to generate quick profits. Some even borrow from financial institutions to amplify their subscription volume. The heightened demand also drives up the grey market premium of these stocks, thereby attracting investors. Consequently, the heavy demand for IPOs leads to significant listing gains, as those who missed out on the initial allotment attempt to accumulate shares on the listing day.

Fundamental and pricing should always be the primary criteria for investment decisions, besides integrity of management. Equity investment in a sound company should be a long-term goal and that holds true for IPO, too.

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