Investors would have been better off with fixed deposits than IPOs: study

A new study has found that you had a better chance of making money from a simple bank fixed deposit than the primary market.

Institutional Investor Advisory Services (IiAS) looked at the 394 initial public offerings made from April 1, 2003 to July 31, 2014 and found that only 164 of those companies (42 per cent) are currently trading above their offer price.

Further, of the 164 companies that are delivering returns to investors, the gains are not significant. In 20 per cent of these companies, the shareholder advisory firm, found investors would have made higher post-tax returns by investing in fixed deposits rather than these IPOs, at a pre-tax coupon rate of eight per cent. (For the study, current share price was taken as on January 16 or 28, 2015.)

IiAS split IPOs four ways based on issue size and found a correlation between size and success of the IPO. Of the first quartile of largest IPOs, 53.9 per cent of the issues gave positive returns. But there were only 41 such issues over the decade sized at ₹5,000 crore and above.

The success rate has steadily moved down to 50 per cent (for ₹5,000-10,000 crore), 46.1 per cent and 35.2 per cent for the lowest quartile. Whereas seven of the 10 largest issues quote above the issue price, in the case of smaller issues only three quote above issue price.

IiAS has used this parallel to argue in favour of a higher minimum IPO threshold. “Larger companies,” the report said, “tend to have a higher threshold to absorb shocks and have also reached a certain business level before raising capital through the IPO route. There is a virtuous circle around large IPOs. These are also more likely to attract institutional investors, because they can take a larger bite.”

Additionally, IPOs of public sector firms have outperformed private sector. Of the 20 PSUs, 75 per cent have generated positive returns. On the other hand, only 40 per cent (149 of the remaining 374) of private sector IPOs generated positive returns.

IiAS attributes two factors to possibly account for the stellar PSU performance: one, that government has cherry-picked the PSUs to be listed, and two, fiscal pressures meant that there was limited flexibility with regard to timing, resulting in shares being sold even in the midst of a bear market.

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