Monday, July 9, 2007

IPO's- Retail participation decides listing price

MUMBAI: Foreign portfolio managers and big institutions may be the movers and shakers in the market, but it’s retail investors who decide the listing price of an IPO. The strong backing of cash-rich institutional investors alone does not really guarantee a blockbuster first-day for public issues on the bourses. An ET study on 49 IPOs of this year reveals that listing prices were distinctly higher for shares where the equity offerings had a wider retail participation.

The hi-premium listing of ICRA, Global Broadcast, MIC Electronics and Vishal Retail substantiates this. While Vishal Retail listed at a 75% premium, ICRA and Global Broadcast opened at 59% and 67% premium, respectively. All the three IPOs logged a retail subscription of 58, 52 and 45 times, respectively.

So, is there any correlation between subscription and listing? “There is and there is not. The thumb rule is, if there is quality demand for subscription, the issue should see a good listing. The basic idea is that if there is unsatisfied demand, investors will continue to buy the stock when it enters the market.

The initial stock momentum of a newly-listed company is wholly dependent on retail participation,” says S Ramesh of Kotak Investment Banking. Agrees Ananta P Sarma of IDBI Capital: “If overall subscription to an issue is in the range of 1- 8 times, then there is a good possibility that the stock will dip marginally on listing. But when there is heavy over-subscription, the listing will be on a higher premium and gains would be larger.”

Though qualified institutional buyers (QIBs) have begun subscribing to every issue, it is retail investors who keep the stock up in the initial weeks of listing. Heavy subscription by retail investors help the stock to sustain its price for a longer term. While a section of the market also believes that retail investors are more stable as far as holding time of the stock is concerned, this is not necessarily true since many retail investors exit the stock on the first day. Retail investors are believed to have put in about Rs 8,000 crore into equities in June alone. Of this, about Rs 3,150 crore was invested in ICICI Bank’s follow-on public offer and about Rs 2,700 crore in DLF IPO.

At this point, one should remember that about 94% of the total IPO application money (among retail investors and HNIs) comes from 15 ‘IPO- crazy cities’.

A good article from Economic times                                                              

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