The IPO lottery

Initial Public Offerings have created enormous wealth in the past three years. An analysis of what makes them so special.

By Narayan Krishnamurthy | Print Edition: November 30, 2006

When blue-chip multinational company Pond’s, nudged by the Janata Party government to dilute its equity stake, came out with an initial public offering (IPO) in 1977, its shares were lapped up by investors. Issued at Rs 20 a share—a premium of Rs 10—the stock eventually listed on the Bombay Stock Exchange at Rs 350—a gain of Rs 330 per share on the day of listing. That translates into a return of 1650% in about 90 days, or roughly 6700% on an annualised basis. The bounty continued to roll out for the next couple of years as many more foreign companies offloaded their shares to the Indian public.

In the 30 years since the Pond’s issue, the market has changed beyond recognition. Adam Smith’s invisible hand has replaced the Controller of Capital Issue’s stranglehold over the pricing and size of public issues. Companies are now free to price their issues, even though the market watchdog, the Securities and Exchange Board of India (Sebi), is more alert and surveillance is more rigorous. There is greater transparency and investors are more informed. What hasn’t changed, however, is that IPOs continue to remain the lottery they were have always been. In December 2003, Indraprastha Gas’ IPO priced at Rs 48 a share was listed at Rs 199.70, a 316% return in 28 days, or an annualised gain of 4119%.


Sure not all IPOs have given such spectacular returns and a few have actually resulted in equally big losses. Also, IPO investing requires a considerable outlay. If you have applied for 500 shares of a company at Rs 200, that’s Rs 1 lakh blocked for up to 45 days. Considering the extent of oversubscription to IPOs, you may be allotted only about 100 shares (see pullout section on allottment procedure). In cases where the allottees are selected by lottery, it could be that you get no shares. Imagine the opportunity costs of not fruitfully deploying Rs 1 lakh in a booming market.

The allottment hurdles notwithstanding, it is the assurance of returns that sets IPO investment apart—especially if the experience in the recent bull run is anything to go by. As many as 98% of the IPOs that came out since April 2002 opened at a premium to the issue price on listing day—a failure rate of just 2%. That makes the current rush of IPOs the rarest of the rare investment options: one that is high on reward, yet low on risk. Says Parag Parikh, chairman of Parag Parikh Financial Advisory Services: “IPOs are bound to do well till the markets are on the rise.”

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