Nearly 60% IPO investors in past decade lost money: IiAS Report

The bull run in the stock markets may have prompted a number of companies to launch initial public offerings but a majority of those who invested in such share sales over the past decade have lost money, according to a study by proxy advisory firm Institutional Investor Advisory Services (IiAS).

The Bombay Stock Exchange's benchmark Sensex reached its all-time high of 30,024.74 in January this year, surpassing the psychological 30,000-mark for the first time. That has led to a spurt of IPOs on Dalal Street. Total IPOs lined up in 2015/16 are estimated to raise Rs 9,000 crore. This is more than triple the Rs 2,769 crore raised in 2014/15 and 10 times the Rs 919 crore mopped up the year before.

While retail investors must be viewing it as a perfect opportunity to invest in IPOs, the IiAS report says almost 60 per cent investors who put in their money in IPOs since April 2003 have lost their money. The IiAS study of 394 IPOs between April 1, 2003, and July 31, 2014, reveals that only 42 per cent, or 164 companies, are trading above the offer price. Of these 164 companies, 32 companies gave negligible returns and investors would have been better off investing in fixed deposits rather than in these IPOs. "Investing in IPOs is like a game of chance - information on the track record of the company is limited, the correctness of valuations is questionable," the report said.

The report would have looked worse if the study was based on market prices a year ago. At price levels of Jan 16, 2014, 70 per cent of the 394 IPOs were trading below their offer price, the study found. The study also noted a couple of other discouraging findings. It said 25 companies (six per cent of the total) that raised money through IPOs between 2004 and 2013 have been suspended for either procedural lapses or as a penal action. Also, more than 70 per cent companies reported lower net profit margins and return on equity ratios than in the financial year when the shares listed.

The report said that size is possibly the only factor that correlates to the success of an IPO. It divided the companies into four quartiles by IPO size. In the top quartile comprising the largest issuers, 53.9 per cent companies gave positive returns. This proportion steadily moved down to 50 per cent, 46.1 per cent and 35.2 per cent for the lowest quartile. Seven of the 10 largest issues quote above the issue price while only three of the 10 smallest issues do so. "Unfortunately for investors, most IPOs have been of small size -- of the 394 IPOs, only 20 had an issue size greater than Rs 100 crore," the report said.

IPOs of public-sector companies (PSUs) have outperformed private-sector IPOs. Of the 20 PSUs that listed during the last decade, 75 per cent generated positive returns. "Two factors possibly account for the PSU IPOs' performance: One, that the 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," the report said.