Investing in Initial Public Offerings (IPOs) is a high-risk, high-return game. If you had subscribed to the mega IPO of Reliance Power, which raised ₹11,700 crore in 2008, you would be staring at a loss of 82 per cent now. On the other hand, if you had subscribed to offers made by Page Industries or YES Bank, you would have gained over 2,000 per cent.

But the probability of an investor making money in an IPO has markedly increased over the last four years, largely due to regulatory action.

A BusinessLine analysis of the performance of IPOs since 2004 reveals that investors have lost less in the primary market after 2011.

Only four of the 10 IPOs made between 2004 and 2011 are trading above their offer price now. However 6 of the 10 IPOs made between 2012 and 2016 are currently sporting gains. Offers made on both the SME platform, as well as the main board, were considered for this analysis.

Coming of age

“The IPO market in India has matured over the last five years, especially after the global meltdown,” says Premal Doshi, Managing Director, ECM, Ambit Corporate Finance. “The quality of companies listing on the main board has improved significantly. Most of the companies already have a PE (private equity) investor on board. Recent IPO issuances have been from companies with a good financial track record and corporate governance practices.”

This is reflected in the numbers, too. Of the 45 primary offers made in 2014, 71 per cent are trading above their offer price with stocks such as Wonderla Holidays gaining more than 200 per cent. Of the 58 issues in 2015, 22 per cent gained between 50 and 150 per cent.

The list includes Syngene International, Dr Lal PathLabs and Manpasand Beverages. The track-record is good in 2016 too, with more than a fifth of the stocks returning more than 50 per cent.

The improvement is thanks to market regulator Securities and Exchange Board of India (SEBI) clamping down on malpractices in IPO issuances and stock price manipulations post-listing, in 2010 and 2011.

Safer than before

Many promoters and investment bankers were hauled up and a series of regulatory changes were made in that period, including the introduction of listing-day call auctions and making book running lead managers (BRLMs) accountable.

“It is much safer than it was in earlier times,” says Pranav Haldea, Managing Director of PRIME Database. “The regulations have ensured that only good quality companies are able to come to public markets.”

“The onus that SEBI places on the company and the BRLMs for the disclosure and diligence has resulted in significant improvement in the quality and quantum of disclosures in the prospectus,” says Doshi.

IPOs on the SME platform, however, continue to be riskier as they require fewer disclosures. But retail investors have been discouraged from this platform by pegging the minimum IPO subscription at ₹1 lakh.

A 50-50 shot

However, if the aggregate numbers from 2004 to 2016 are considered, an investor would have had a 50 per cent chance of choosing an issue that made gains. Of the 563 issues that were made since 2004, only 267 are trading above the offer price. A third of the IPOs since 2004 have lost more than 50 per cent.

So, what are the checks that investors need to run to avoid buying a lemon? “Retail investors should be very careful with IPOs as the track record of the company is relatively limited. They need to evaluate the company’s business model, management and valuation,” says Manish Gunwani, Deputy CIO, Equity, ICICI Pru AMC.