Advantages of Investing in an IPO

Are the any specific advantages of investing in equities through the IPO route? Many investors believe that IPOs are a short cut to quick money, which is not the case. In fact, such a fallacy about IPO share price can be quite misleading. IPO investment must be looked like any other investment in secondary equities and requires the same due diligence. IPO share price is also a gradual value creator like any equity investment. The real benefits of IPO are not just about returns but the opportunity to participate in a growth story at an early stage. That is what makes IPOs special. Of course, the onus is still on you to do the homework and then identify the best IPOs to buy.

It is also very important that you understand the process flow of the IPO quite well so you can make the best of it. One important part of the IPO process is the allotment process, which is the basis for deciding whether you get allotted shares and if so, how many shares you should get. Today, investors can check the status of IPO application online to get an idea of where they stand. They also verify online with the registrar website on IPO allotment status for different issues. There are several merits in investing in an IPO so keep these advantages in mind when you make a list of the best IPOs to buy in primary markets.

Key benefits of investing in an IPO

In the last 25 years, the IPO markets have become more efficient, more sophisticated and more technology driven. Here is how the investors can gain a distinct advantage by focusing on IPO investing.

1) You heard the famous quote of catching them young and watching them grow. That is what IPO investing is all about. For instance, many of us do wish that we had bought Infosys or Maruti or Bharti Airtel or D-Mart in their IPOs. All these stocks have been multi-baggers many times over. Typical long term investor would tell you that the real fun in investing is not in buying large caps which is tracked by scores of analysts and everyone knows the story. These large caps can at best give market related returns or slightly better than market returns. The real meat is in the IPO at low market caps that can become multi-baggers later. For instance, IRCTC went up 10 fold within one year of its IPO. That is the kind of returns that investors can expect in an IPO.

IPO investing is all about buying a small cap stock with the potential to become a large cap stock. That is where a quality IPO can add tremendous value to an investor. IPO gives access to new and emerging stories with good long term potential and you are actually helping an entrepreneur with a raw business model with money. Of course, we must remember that not all IPOs will end up being multi-baggers, but even if a handful of them can help you hit the jackpot, the entire exercise of investing in IPOs can well be worth the trouble.

2) In India, IPOs have often given access to quality PSU stocks at the time of disinvestment. For instance, in 2003 when PSU banks like syndicate Bank and Canara Bank were listed, their IPOs gave multi-bagger returns in less than 2 years. It is not just about the banks, but several PSU IPOs created tremendous value. HAL, BEL, BEML, Mazagon Docks, Cochin Shipyards are all classic examples.

The PSU IPOs in India are less preferred by large and influential investors and hence are available at very reasonable valuations. Secondly, we must not forget that these PSUs tend to offer good dividend yields. For instance, PSU companies in the oil & gas space, PSU banking space and the minerals space are fine examples. Thirdly, most are stable players and with the government working hard to boost the fortunes of PSU companies, IPOs of PSU stocks can add quality paper in the market and also provide opportunities for solid above market returns.

3) One very strong reason to invest in IPOs is that retail investors get special preference in IPOs. We all know that the secondary market is a tough place and extremely competitive. It is more of an institutional cum HNI game and retail investors find it difficult to buy quality stocks. That is where the primary markets or the IPO markets give these retail investors an edge. Here is what SEBI has done in IPOs for the retail investors.

SEBI has worked hard to ensure that small retail investors get a fair deal in IPOs. Here is a case in point. Retail investors are eligible for discounts over the issue price as we saw in the case of LIC. Also, within the retail quota, smaller investors are eligible to get higher allotments under the new allotment norms since the thrust is on broadening retail ownership. These benefits are not available in the secondary markets and hence retail investors have an edge.

4) Did you know that one of the biggest advantages of investing in an IPO is that it offers a very delectable combination of sound regulation and information symmetry. These are 2 different aspects but closely related. Let us focus on sound regulation first. SEBI regulations on IPOs have impelled companies and investment bankers to follow higher standards of disclosure and transparency and these corporate governance efforts actually work to the benefit of retail investors. This has made IPO markets safer for small investors, unlike in the past when fly by night operators would rule the roost. Secondary markets have a glut of information but limited insights, but IPOs consolidate most of the intelligence into the prospectus. That is the source of information symmetry, which is the second point we had mentioned.

In secondary markets, it is normally the institutional investors, analysts and insiders who have a clear edge over the small and retail investors in terms of information access, insights, research strength etc. IPOs are not tracked by analysts and that makes them the same for all investors. The only legitimate source of information in any IPO is the prospectus and that is a public document available to one and all. A retail investor, in terms of information availability, is at par with more privileged investors and that is what makes investing in IPOs very special.

5) Finally, retail investors have the ASBA benefit in IPOs, which reduces the lock-in and related losses pertaining to opportunity cost of funds. In the IPO market, the retail investments are routed through ASBA route. Now, ASBA is short for Applications Supported by Blocked Amounts. This ASBA facility ensures that the amount is debited only after the shares are allotted an till then the amount is only blocked. So you continued to earn interest for that period. Also, the unfreezing of funds is quicker under ASBA. These are the kind of advantages that make IPO investing special for investors.

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