Oversubscription of IPOs — a pointer to revival?

Welcome to the world of primary markets. Suddenly, the IPO market is abuzz with activity. The latest three issues — IRCTC, CSB Bank and Ujjivan Small Finance Bank — have attracted huge public response. Interestingly these offers have attracted all categories of investors — institutions (FIs, MFs, FPIs and insurance), retail investors and high net worth individuals.

This phenomenon is not restricted to India alone, but is reverberating across the world. Saudi Aramco, the world’s biggest public offering was subscribed fully, resulting in a $25.6-billion mop-up. Saudi Aramco priced its IPO at 32 riyals a share, at the top of its price band and is set to beat Alibaba Group Holding Ltd’s record $25-billion listing in 2014. Aramco’s shares are scheduled to start trading on December 11 on Saudi Arabia’s Tadawul stock exchange.

Alibaba Group Holding itself made its secondary listing in Hong Kong, raising $11.2 billion in November, making it one of the largest fund-raisers. AB InBev raised $5 billion in Hong Kong through its Budweiser APAC public issue in September.

The interest in IPOs in a volatile secondary market has caught the investor fraternity by surprise. So far this year, 15 firms have gone public in the Indian main markets collecting a little over ₹12,000 crore. The IRCTC issue was subscribed 112 times, Ujjivan SFB received bids for 166 times, and CSB Bank for 87 times.

Meagre portion for cos’ needs

Though the fund-raising by Indian companies is in no way comparable to the size of global firms, they nevertheless point to a glut of public money. However, a large portion of the amounts raised from the IPOs went to the promoters, private equity firms and other existing shareholders, who had sold their stakes during the public issues. Sadly, only a small portion went to fund the companies’ needs such as business expansion plans, loan repayments and working capital requirements.

Some of the other companies that launched their IPOs in 2019 include Sterling & Wilson Solar, Spandana Sphoorty Financial, Affle India, Chalet Hotels, Rail Vikas Nigam, Metropolis Healthcare and Polycab India.

Shares of most of these companies that were oversubscribed are trading well above their issue prices and have given handsome returns. So, should one consider oversubscription as a factor for future public float nvestments?

Oversubscription is a factor of demand, which is generally high when the secondary market is positive. Apart from a vibrant secondary market, pricing is another crucial element.

Investors should bear in mind that though oversubscription to an IPO is a good sign, that cannot be the criteria. Companies’ fundamentals and management integrity are key elements. Of late, absence of integrity among promoters has proved to be a major headache fior nvestors. If a company offers a long-term growth story, along with the right price, investors will definitely benefit in the short as well as the long term.

In some cases, investors, especially high net worth individuals, subscribe to make quick money. They borrow from financial institutions to subscribe to the issue and make whopping listing gains.

Without knowing the gameplans of these smart short-term investors, retail investors fall prey to their actions by playing second fiddle.