Why retail investors stayed away from IndiGo, Coffee Day IPOs

India's primary market witnessed a lot of buoyancy in October with the initial public offerings of low-cost airline IndiGo and coffee chain operator Coffee Day Enterprises sailing through with large oversubscription, but what took the sheen off it was the way retail investors cold-shouldered these issues.
 
Qualified institutional investors (QIBs), especially foreign institutional investors, may have bid for the issues in droves, but retail investors largely stayed away, as was the case with many other IPOs launched earlier this year.
 
"Retail participants do not understand primary market at all. They just follow QIBs. The way IPO pricing is done is difficult for them to grasp. Volatility in the secondary market has also discouraged them to invest in IPOs. They will come only when they see a lot of money being made, and then they would not want to miss the boat. But that has not happened. All IPOs are being launched at huge premium," Prithvi Haldea, the chairman and managing director of Prime Database told Business Today online.
 
Usually, an IPO boom tends to follow a sustained bull run in the secondary market. India's benchmark indices rose to new highs early 2015 riding on the euphoria created by a reformist government at the Centre. The primary market had its fair share of run, with 52 IPOs hitting the market by mid-October, which has been the highest since 2010.
 
But that investor enthusiasm is beginning to wane in the secondary market due to factors both local and global; and that cautiousness has got rubbed off on the primary market as well.
 
Haldea of Prime Database believes no big-ticket IPO is likely to hit the market anytime soon.
 
"There have been just one or two IPOs a month. I do not see a big boost to IPOs. Though the pipeline is strong and many companies have filed papers with Sebi, they are not significant ones,"  Haldea said.
 
IPO frenzy a myth
 
The number of IPOs have doubled over the last three years. But data from the last 12 years (as complied and interpreted by IIFL) suggest just one-third of the issues have outperformed the market in a year post listing and just 25 per cent outperformed three years post listing.
 
"Over the past 12 years, there have been 575 IPOs, which raised more than $40 billion. Of these, just over 500 IPOs have a price history of more than a year. Of those 500 IPOs, a majority (54 per cent) have delivered negative returns after one year of trading (implying stock trading below issue price one year post listing). Of the remaining IPOs that did deliver positive returns a year after listing, a further 20 per cent underperformed the benchmark Sensex. Thus, just over a third of the IPOs have historically outperformed the market and were (at least on ex-post basis) 'investible'," the IIFL research note said.
 

 
Retail investors and IPOs
 
Haldea pointed out there was no way a retail investor would know how the price band of an IPO has been fixed. The IIFL report corroborated the fact and noted that information asymmetry between the seller and the buyer is one of the fundamental issues that deter investors from investing in IPOs.
 
"The seller of shares in an IPO is usually an insider, and he has significantly more information on the current and future prospects of the company than any outside investor. Given this information asymmetry, it is unreasonable to expect that insiders would part with their stock on unfavourable terms, unless it is a distress sale. This in itself is sufficient reason for many investors not to invest in an IPO," the IIFL note said.
 
In the IndiGo IPO, the promoters of InterGlobe Aviation reduced the number of shares they had initially planned to put up for sale just before the launch, leaving investors, already perplexed by the company's negative worth and dividend policy, wondered even more.
 
Gaurang Shah, Vice-President of Geojit BNP Paribas, noted that the actual reason would never be known to public.  "It is the job of merchant bankers to suggest promoters what they should or should not do. They might have realized later that the number of shares did not require to be huge or the promoters would have thought they will get better price post listing, whatever be the case, the real reason will not come out," Shah told Business Today online.
 
The shady nexus of iBankers and company promoters and the lack of reliable information flow often deter retail investors from taking a plunge into the primary market. Haldea noted the response to IPOs depends on how economy and secondary market behaves. A volatile secondary market doesn't bode well for primary markets, so is the case now.
 
IIFL in its research note said, "The number of public offerings goes up significantly when the equity markets are buoyant. The number of IPOs is strongly correlated to preceding year's equity market performance. A year with strong equity market returns is usually followed by a sharp increase in number of IPOs."
 
IPOs in last 5 years