In the recent past we have seen quite a few IPOs that got listed at a discount to the issue price and prices have remained lower since. For example, in the case of ICICI Securities, the issue got undersubscribed and the listing was almost at a 20 % discount to the issue price. The stock currently quotes at a discount of 30 % to the issue price. What explains this phenomenon? For that we need to understand how IPO listing price is decided and the reasons for the difference between issue price and the listing price. On the day of listing, it also depends on how is the opening price of an IPO determined. Let us look at some of the reasons why the IPOs tend to listed at a discount to the issue price.

Low demand leading to under-subscription of the issue
We have seen this phenomenon happen in quite a few issues in the recent past. A stock typically gets a good listing if the response of all the 3 segments of the IPO investors; retail, non-institutional and QIB to be robust. Under subscription could also happen if the market conditions during the period of the IPO are not very favourable due to a mix of global and domestic triggers. Such a situation is also possible if the company belongs to a sector that finds itself out of favour. An issue that struggles to get fully subscribed normally gets a tepid listing in the bourses.

Aggressive pricing of the IPO
This is one of the most common reasons for an IPO listing at a discount to the issue price. Many of the non-life insurance companies and PSUs that came out with IPOs in the recent past had priced the issue at the upper end of their valuation band. That is not a great feeling for markets when they realize that not much is left on the table for them. This is typically a situation that arises in two conditions. Firstly, when retail enthusiasm is building up after a series of very successful listing, there is a tendency for overpricing an issue. Secondly, an OFS tries to give exit to existing shareholders and the pricing automatically tends to be very aggressive.

 Market conditions at the time of listing
The IPO market conditions and the secondary market conditions at the time of listing can also impact listing price. For example, in the last few months, there have been negative cues in the market like the global trade war, the Turkish Lira crisis, the slowdown in China, the sharp rise in crude oil prices etc. A combination of such negative cues can negatively impact the listing performance of the IPO. Recently listings have been tepid largely because of the negative news flows and the inherent macro risks.

When there is risk-off flow from Foreign Portfolio Investors (FPIs)
Between April and June 2018, Foreign Portfolio Investors (FPIs) have taken out nearly $10 billion from India due to heightened risks. This was from equity and debt put together. When there is a surge of outflows from the market, it impacts the appetite of QIBs and of other classes of investors for these IPOs. It is normally seen that the when the FPI selling is quite heavy, then IPOs tend to get tepid listings due to the lack of interest in stocks. Investors normally prefer to wait for foreign buying to come into the market in a big way.

When IPO funding is not an attractive option any longer
This is an interesting factor which impacts the non-institutional portion of investments. Normally, these HNIs that constitute the non-institutional portion tend to rely on IPO funding for putting their applications through. When the HNI portion gets heavily oversubscribed it is an indication of a healthy listing as HNIs require a healthy listing to make money after covering their funding costs. When banks do not see oversubscription they are wary of funding and that is also a reason for tepid listing of IPOs.

In short, there are a variety of factors that impact the listing price of an IPO. While company fundamentals and market conditions matter a lot in determining the listing price, it is the aggression in pricing that eventually makes a difference to the listing price. We have seen aggression in pricing in case of OFS and also in case of nascent industries like insurance with limited trading history.