IPO Tips

I have been getting a lot of enquiries from retail investors who apply in IPO’s for the purpose of listing gains. A lot of them have been making listing losses by applying in the wrong IPO and/or by following wrong strategies. Hence, I thought I should share some tips which I have been following to make “investing in IPO’s” profitable for retail investors.

The truth is, investing in IPO is an easy, low-risk way to make an average of 2-3% in 20 days. A 2 -3% return can seem very low on a nominal basis, but when you calculate the annualised return it becomes very attractive. You can make an annualised return of about 30%, ona an average, easily by investing in quality IPO’s by following the guidelines mentioned below. Infact I have made an annualised return of over 125% in a few IPO’s like the Sun TV IPO, Parsavnath IPO, Infoedge IPO (naukri.com IPO) and a few others. Now tell me which other investment class with similar risk reward structure will give you as much returns.

Here are eight guidelines that should be followed by retail investors to select the IPO’s to invest in and make sure the risk involved is minimum and at the same time ensuring chances of allotment are very high.

These tips are applicable only to those investing in IPO’s for listing gains

Tip - 1 : How do you select which IPO’s to invest in? Do research and a detailed fundamental analysis of the company? Read third party research reports? Listen to rumours, tips and gossip? Well, If you have been doing this in the past, I would suggest that you stop doing this immediately. Trust me on this - Its of no use. As a small investor, you will never get access to all the information you need to do your own analysis of the IPO. Don’t read third party research reports either because most of them would have a conflict of interest. Investment banks and brokerage firms through their reports might try to push the IPO’s of their clients and ensure that they retain getting that company’s business in the future. Magazines and newspaper reports can be biased and vested interests can be involved.

You would by now be wondering how else you could select IPO’s. Here is a simple secret. Blindly invest in a particular IPO, if the institutional category is oversubscribed by over 5 times. Institutional investors have access to information that retail investor will never have access to. This sometimes involves even insider information. So, just leverage on their analysis.

Tip - 2 : Always invest at cut-off price. The “cut off ” feature is an excellent facility that is offered only to retail investors. Make sure you make use of this facility.

Tip - 3 : Make sure you apply for the maximum shares possible that a retail investor is eligible to applyfor (Rs. 1 lakh limit). If you apply for the minimum shares its like throwing darts on a dart board. Most probably you will not get allotment and you would just end up locking your money for 20 days.

Tip - 4 : If you find 3 or 4 IPO’s which are good but have only 1 lakh of capital to invest, select the best IPO among the 3 and invest in it. Don’t split your money. You might end up not getting allotment in any of the IPO. Diversifying doesn’t work in IPO’s

Note - The next tip might seem unethical. So all of you out there who are very particular about ethics, kindly do not read the fifth tip. Further, It is just my personal opinion and I don’t endorse or recommend the following tip. It has worked for me in the past, but it might not work in future. I would take no legal liability / responsibility if you choose to follow the next tip and you get into trouble.

Tip - 5 : Many people would think this is not ethical but I do. I always apply for an IPO through a cheque. Once the final subscription figures are released and if I find that either the institutional investor category has been subscribed less than 5 times or if I find that the retail investor category has received much higher response than the institutional investor category (increases the chances of a bad listing, since most retail investors would sell on listing and there would be a huge selling pressure on the day of listing) or if I find to my dismay that the IPO has been oversubscribed by more than 50 times or so, then I would go ahead and give a stop payment.

As mentioned already, I’m not endorsing or recommending the previous tip. Its just my personal strategy / opinion.

Tip - 6 : If you want to invest more than 1 lakh in a particular IPO, invest in more than 1 application. Never invest more than 1 lakh per application. You can invest in your spouse’s name or your mom/dad’s name

Tip - 7 : Update your ECS details and make sure you write the following in bold and very clearly in the IPO application form.
1) Your name
2) Your DP details

If your name or DP number is incorrect or unclear, then you will face unnecessary delays in getting the shares alloted and you wouldn’t be able to sell on listing. Also make sure you opt for ECS refund. Cheques can be lost or delayed and lazybones like me would take over 1 month to deposit a cheque in the bank. ECS is hassle free and safe.

Tip - 8 : Sell of the shares alloted to you on the day of listing. Sell 50% between 9.55 and 10 AM and the rest in the afternoon. The shares of that particular IPO might do well in day 2 and day 3 and in subsequent weeks too, but I have seen an equivalent number of IPO’s which have witnessed a huge fall in the second and third day after listing. You have invested in the IPO for listing gains, so make sure you sell it off as soon as the company lists on the stock exchange. This way you will be exposed to the least amount of risk.

IPO terms

Coming across a lot of new terms? What do they mean?

Green-shoe Option: A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days through a Stabilising Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15 per cent of the issue size. From an investor's perspective, an issue with green-shoe option provides more probability of getting shares and also that post-listing price may show relatively more stability as compared to market.

e-IPO: A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the specified requirements. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.

Safety Net: Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalised by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy-back or safety net arrangements shall be made available only to all original resident individual allottees up to a maximum of 1,000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities.

Syndicate Member: The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an `Underwriter' as syndicate members. The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.

Open book/closed book: At present, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the Open book system of book building.

Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open.

Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

Cut-Off Price: In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called "Cut off price". This is decided by the issuer and Lead Manager after considering the book and investors' appetite for the stock. Only retail individual investors to have an option of applying at cut off price.

Differential pricing: Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. Differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters' contributions.

Source: www.sebi.gov.in