Will safety net bring in more retail investors for IPOs?
Siddharth Tak/ Rohit Joshi/ZRG
Just Dial IPO has deployed safety net as proposed by SEBI. In addition to it, this is for the first time that any company has offered a huge discount of 10 percent to the retail investors. However, will this safety net help in regaining the confidence of retail players? A safety net is a scheme where the company promoters assure that they will buy back shares from the retail applicants at the IPO price, if its stock falls sharply during the first six months after listing.
Just Dial IPO got subscribed nearly 12 times with the retail investors subscribing to three times of their offered shares. In the past, the retail investors who had invested their hard earned money in many IPOs got their fingers burnt as many of these shares are currently trading significantly below the issue price.
According to a Prime Database data analysis for primary market issues during last two years, there are several instances where initially retail category got oversubscribed and thereafter shares fell sharply on the bourses over a period of time. The retail investors of Taksheel solutions IPO saw their category getting subscribed 6.04 times. The public issue got listed on October 19, 2011 (issue price was Rs 150) and till now it has generated negative returns of 97.1 percent.
Similarly, the retail investors of Brooks Laboratories IPO saw their category getting subscribed 3.59 times. The public issue got listed on September 5, 2011 (issue price was Rs 100) and till now it has generated negative returns of 83.4 percent.
Furthermore, the retail investors of Timbor Home IPO saw their category getting subscribed 13.96 times. The public issue got listed on June 22, 2011 (issue price was Rs 63) and till now it has generated negative returns of 73.7 percent.
Even bigger issues of CARE and MCX have failed to impress the retail investors. The public issue of CARE was subscribed 5.98 times by retail investors. The public issue got listed on December 26, 2012 (issue price was Rs 750) and till now it has generated negative returns of 6.2 percent. Furthermore, the public issue of MCX was subscribed 23.42 times by retail investors. The public issue got listed on March 9, 2012 (issue price was Rs 1032) and till now it has generated negative returns of nearly 11.6 percent.
Commenting on the pricing issue, Gaurang Shah, Assistant VP, Geojit BNP Paribas Financial Services, said, “Nowadays, both the promoters and lead managers to the issue have become careful in pricing the issue post the debacle witnessed in the performance of the IPOs which got listed in the last two years. Subsequent action taken by SEBI has brought in discipline related to the pricing of IPO.”
The introduction of safety net is an innovative step. Shah at Geojit BNP Paribas said, “It will certainly boost the confidence of retail investors. Going forward, more and more companies should adopt this strategy.”
Reiterating the view, Gaurav Jain, director, Hem Securities, opined, “Safety net is going to provide the additional comfort and investment security to the retail investors. This will definitely boost the confidence level among the retail investors. The major thrust is to increase the number of retail investor in the market and SEBI also wants new people to invest in the IPO market.”
Referring to the outlook of IPO market, Shah at Geojit BNP Paribas averred, “Going forward, I think that new IPOs won’t face similar situation as seen in the last two years. However, the appetite for IPO market will depend upon the quality of paper and pricing.IPO market is directly correlated to the secondary markets therefore revival in economy and the secondary markets will help in bringing back the participation of retail investors.”
In contrast, there are public issues which have provided positive returns. The retail investors of L&T Finance IPO saw their category getting subscribed 9.34 times. The public issue got listed on August 12, 2011 (issue price was Rs 52) and till now it has generated positive returns of 49.7 percent. Similarly, the retail investors of Lovable Lingerie IPO saw their category getting subscribed 20.17 times. The public issue got listed on March 24, 2011 (issue price was Rs 205) and till now it has generated positive returns of 33.4 percent.
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