The Hindu Business Line : Investing in IPOs? Look for employees' participation

Chennai March 24 Looking for clues to invest in initial public offerings? Employee response to the shares reserved for them may perhaps offer someclues.

A Business Line study on the IPOs of companies in 2006 showed that there is a 68 per cent chance that the share will quote at premium to offer price if the portion reserved for employees is fully subscribed.

Of the 34 issues last year, where employees' portion was either fully or over-subscribed, 23 issues or 68 per cent, are currently trading at a premium to the offer price.

On the other hand, only one out of every four issues that were under-subscribed is trading at premium.

Though most of the recent issues that hit the market were oversubscribed, with some receiving strong response, they received poor response from their own employees. Of the 61 issues that offered shares to its employees in the last one-year only 34 issues were fully or oversubscribed.

Some examples

The MindTree Consulting stock, which received strong response (by 3.8 times) from its own employees, is currently ruling at a premium of 102 per cent. House of Pearl Fashions, which saw only 11 per cent response from its employees, is trading at a discount of 33 per cent to its offer price.

Consider the contrasting picture in the other IPOs.

Despite strong employee participation, Parsvnath Developers is trading at Rs 275.35, a marginal discount to the offer price of Rs 300.

Even as Info Edge, which saw only 28 per cent response to its IPO from employees, is quoting at a 113 per cent premium to its issue price.

So can the employees' participation be considered as a key factor while subscribing to IPOs?

Conclusive picture

Market pundits, however, do not present a conclusive picture, but their views are worthy of consideration.

There could be many others factors limiting the employees from participating in the offer, other than what the employees perceive about their company, says the Managing Director of Prime Database, Mr Prithvi Haldea.

"The capital market does not enthuse all employees; in fact, 97.5 per cent of the Indian population do not invest in capital markets. Apart from that the employees prefer ESOPs, which they get at cheaper valuation, compared with IPOs," he said.

The Senior Manager of Apollo Sindhoori, Mr D. Subrahmanyan has a word of caution.

He says, "Though the level of participation by employees in IPOs has been found to be a judging factor on listing gains, it cannot be taken as rule of thumb. In the case of Indian Bank, there was an opportunity to exit at 10 per cent profit and in the case of Allcargo Global Logistics, the scrip has made substantial gains on holding for five months."

Besides these, there could be other genuine reasons preventing the employees from participating in the offer.

"Reservation for employees in relation to the staff strength could be much higher; and the employees may not always have the funds they require to apply for the shares," Mr Haldea pointed out.

`Negative feelings'

"Historically most of the employees feel negative about their companies," limiting their enthusiasm to participate in the offer, he added.

"The extent to which employees subscribe to an IPO can be a good predictor of what insiders feel about the long-term prospects of a company," said the Managing Director of Amrok Securities, Mr K. Joseph Antony.

"Many companies `incentivise' or `prod' employees to subscribe and hold onto their IPO investments in that company," he said.

If you believes in the maxim that `the employee is right about his company', this could act as a strong indicator to watch out for.

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Investing in IPOs? Look for employees' participation