This question has haunted us for many years; whether it is better to invest through IPOs or through the secondary markets. Before the advent of demat, there was a unique benefit of investing in IPOs. Most secondary markets purchases had to be done in minimum basic lot sizes. Hence equity purchases were outside the ambit of most small and retail investors. The only way out was through the IPO route wherein one would be able to participate in equities even with a small investment. But, all that changed with the advent of dematerialization. The demat system got rid of the concept of lots and it was possible to even buy or sell 1 share of any listed company. Hence investment size was no longer a major constraint to investing in secondary markets.
In the last two years, the IPO euphoria is back in India after a long gap of over 6 years. During the fiscal year 2016-17, nearly $2 billion was raised through IPOs while the fiscal year 2017-18 is likely to see more than $6 billion being raised. But with IPOs getting substantially oversubscribed, the question is whether it still makes sense to look at IPOs. The answer is that it does. Here is why!
IPOs provide access to quality unlisted stocks..
Over the last couple of years we have seen a number of quality unlisted names enter the market through the IPO route. Companies like D-Mart, Shankara Building Products, Dr. Lal Pathlabs, Alkem, Pru ICICI Life, ICICI Lombard and SBI Life have hit the IPO market. This has widened the choice in front of the small investor. The IPO price is fixed by the issuers and the merchant bankers at a level that is likely to elicit the maximum demand. Therefore there is the tendency to leave something on the table for the small investors and that works in favour of small investors. Of course, one can argue that these stocks can also be purchased later in the secondary markets post-listing, but the premiums that stocks have commanded in the recent past, you may end up paying a steep price.
IPOs give access to quality paper from PSUs owned by the government..
In the last 15 years, the divestment of quality PSU companies has given a huge choice of quality paper to invest in. Remember, one of the biggest outperformers of the last 15 years, Maruti Suzuki, was sold to the public by the government through the IPO route. Government owned companies offer the safety of government ownership, comfort of healthy dividend yields and a favourable operating environment. These stocks tend to get overpriced by the time they get listed in the secondary markets. This is one more opportunity for retail investors to get the best through IPOs.
The new IPO norms offer preferential treatment for small investors..
Over the last few years, SEBI has taken pains to ensure that the small and retail investors get a good deal in the IPO market. In this direction, there are quite a few key reforms that have been implemented. For example, retail investors are eligible to get a discount over the issue price that is applicable to HNIs and institutions. Secondly, even within the retail quota, these small investors are eligible to get higher allotments under the new allotment norms with focus on broadening the retail ownerships. These are benefits that are not available in the secondary markets.
IPO norms have been made more stringent by SEBI..
The focus of SEBI has been on protecting the interests of the retail investors and has therefore impelled companies and investors to follow higher standards of disclosure and transparency. This has resulted in making the IPO markets a lot more professional and safe for the retail investors. Unlike the secondary markets where there is a glut of information but limited insights, the IPOs manage to consolidate all the intelligence pertaining to the company into the prospectus.
IPOs give you the benefit of information symmetry..
This is a very unique advantage that IPOs enjoy over the secondary markets. In the secondary markets, it is the institutional investors, analysts and the insiders who have an edge over the small and retail investors in terms of information availability. Since IPOs are not tracked by analysts the only source of information is the prospectus of the company. Therefore a retail investor, in terms of information availability, is on the same plane as other investors. This is a very unique advantage that IPOs offer to retail investors.
IPOs also work out economical under the ASBA rule..
Retail investments in IPOs are routed through the ASBA route. Applications Supported by Blocked Amounts (ASBA) ensure that the amount is debited to your account only after the shares are allotted. Thus, unlike in the past, the small investor does not lose interest on the amount not allotted and therefore works out more economical for him.
A word of caution is warranted here. There is no empirical evidence to say that IPOs have done better than secondary markets in terms of performance. However, tighter regulation has made IPOs a safer and more profitable market to participate in.
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