Initial public offerings or IPOs had been veritable treasure troves for several years now. People invested blindly in any issue and generally made a killing on listing day. But the treasure seems to have turned into trash after the Reliance Power issue. But really, the fault was not of the IPO but of the investor.
IPO investors tend to commit some, often all, of the seven cardinal sins. It’s just that in the case of Reliance Power, this was exacerbated by global and macroeconomic events. The IPO party isn’t really over. It might get a little less boisterous, but few investors are heading home. And they need not. Some good companies will enter the market in the coming months, and you can profit from them, as long as you don’t commit the seven sins of IPO investing.
GREED
Many investors in Reliance Power were expecting huge listing day gains and were hoping to offload their stocks on day one. Their greed made them overlook the fact that by factoring in the company’s growth till 2009-10, the issue was perhaps overpriced. For every seller, there has to be a buyer. As it turned out, on the listing day most investors wanted to sell but there weren’t enough buyers. According to a Wharton School paper, the “irrational exuberance of investors” made them ignore the fundamentals.
Don’t let greed cloud your judgment. Investors pumped Rs 8,60,670 crore in the Reliance Power issue of Rs 11,790 crore; clearly, greed knew no bounds
WRATH
Or how to turn notional losses into real ones. The poor listing triggered panic reaction among leveraged investors who had bought large quantities of Reliance Power shares by paying only a fraction of the money. The panic spread to several small investors as well, even though they had no reason to get jittery. Many of them sold their holdings, thereby turning their notional losses into real ones.
On listing day, the Reliance scrip closed at Rs 372.5—17% below listing price. But it’s been climbing ever since, and has crossed Rs 450
SLOTH
Most investors did not do their homework before investing. Had they spent some time in reading up on Reliance Power and its competitors such as Tata Power and NTPC, they would have got a perspective on the valuation and the company’s projections. But they just wanted to make money without doing the necessary spadework.
If investors studied similar issues, they would have realised that NTPC and Tata Power were far cheaper than Reliance Power
ENVY
It’s human nature to turn green with envy when you see your neighbour make a killing by selling on listing day, time after time. But to let jealousy cloud judgement can lead to disaster. That’s possibly what happened to many Reliance Power subscribers, who did not try to understand the difference between a short-term trade and a long-term investment. Subscribing to an IPO simply because you now want what your neighbour has made in the past is not a great idea, as the Reliance Power issue proved.
Though average listing day gains for IPOs in the past two years have been 40%, that cannot be the only reason to subscribe to a public issue
GLUTTONY
The desire to own a Reliance Power share was so great that even before the IPO got under way, the shares were being traded in the grey market for anything between Rs 600 and Rs 900. Even though such off-market deals are unauthorised, these trades were made much of in the media, adding to investors’ frenzy. What everyone forgot in all the excitement was that if the subscription numbers are huge, the allotment will be insignificant.
With investors wanting as many Reliance Power stocks as they could get, the issue was oversubscribed 73 times.A retail investor got, at most, 16 shares
EXTRAVAGANCE (later Lust)
Egged on by brokerages and media reports, a set of investors overstretched themselves to raise funds to subscribe to the Reliance Power issue. They borrowed heavily at very high rates of interest and applied for more shares than they could possibly afford. The issue was fully subscribed within a minute of opening. Many investors had borrowed at high interest rates to buy Reliance Power shares, and many had sold other shares to raise the cash. A back-of-theenvelope calculation shows that the share would have to list at Rs 600 for them to break even. What happened on listing day was a disaster for these speculators.
Since many investors borrowed to invest in the IPO, the listing had to be 30% higher than the issue price for them to break even on the same day
PRIDE
Unless the company’s business model has a serious flaw—which is not true for Reliance Power—equity investments yield good returns in the long term. Those who subscribed to the Reliance Power IPO because they wanted to benefit from the longterm potential of the power sector or because they felt proud about owning a Reliance share did not panic. For them, the post-listing losses were purely notional. Their patience eventually paid off when the company announced a 3:5 bonus issue—unprecedented so soon after an IPO. But remember, pride is not the reason you should blindly invest in a stock.
The market is often driven by sentiment but you shouldn’t be
