e-Nagar

Most of the large and aggressively priced issues have a provision for a Green Shoe. It is an assurance by the company that it will protect the short term interests of the investors by buying back shares from the open market whenever the stock price goes below the issue price.

ICICI Bank had raised about 12940 Million INR for this purpose and though the stock is more than a 100/- below its issue price the company has till date bought back only a paltry sum of 185 Million INR from the open market. Their crime is aggregated from the fact that a lot of retail and institutional investors are still holding the partially paid share issued to them and they do not have any option/means to convert it to a full share.

The bank is not responsive to its customers, honest to its shareholders and its international investment arm is involved in sub prime lending… no wonder the stock is going down and is showing no signs of recovery.

Recently Central Bank’s IPO was open for subscription and it left me really puzzled. On one hand it was getting very heavy subscription (which usually means there is going to be a good listing gains) and on the other hand i had some reservations about its valuations. (which i felt was too steep)

So this morning I was reading the bank’s prospectus and this line caught my attention:
“PROMOTER: The President of India acting through MoF, GoI”

Guess what was the next thing I did?

Bharat Earth Movers Ltd.
A Bangalore based public sector company specializing in defense contracts and manufacturing of heavy earth moving and mining equipment.
Date: 27th June to 3rd July
Price: 1020-1090

Today a friend dropped by and asked me if he should invest in the offer.
I was like… Why on earth would you invest there?
1) even at the lowest price band the issue would be at 1020 which is at just 1% discount from the secondary market price of 1035/-. So you can never make any quick bucks (even if you make any) from this issue.
2) the BEML is not the most aggressive or the biggest machine manufacturer.. there are better picks to choose from.

Price band 41-46.
Size: About 520 Cr.
Dates: 25-27 June.

I would say investors should avoid this issue.
1) Spice has been constantly making losses in all the telecom circles it operates.
2) It has the 8th largest network… which makes it too small for any strategic investments.
3) The company has not listed even a single move with which it plans to overturn its ailing fortunes.
4) The Promoters (Modi and Telekom Malaysia) are not very serious about the company. They wanted to sell it to Idea (Birla) , but the merger failed due to greediness of Modis. Hence to earn quick bucks Spice is going for this IPO.
5) NSE has refused to list its shares (but it has the permission from BSE)

DLF IPO had an option that retail investors instead of paying 550/- per share, could pay a token 150/- Per share and Pay the rest after allotment.
ICICI Bank FPO also has an offer… instead of paying 950/- investors can pay just 250/- at the time of application and pay the rest within 6 months of allotment.

I am applying to ICICI Bank as an investment, hence I would pay only 250/- upfront and then 4-6 months later pay the balance. On the other hand my father is lured by the 5% discount that ICICI bank offers him and wants to encash it ASAP, hence he is paying the entire amount upfront.
A friend of mine asked me why would anybody make a full payment if the IPO/Offer allows part payment?
My answer (the plain old standard answer….) It Depends!

Why Full Payment
1) If the reasons you are trying to invest is because of “Listing gains” (i.e. you will sell the entire holdings the moment you get the possession of the certificates) Then it makes sense to apply in full. At the time of listing there is a price discovery mechanism which causes the prices to jump up and down a lot… hence improving your chances to make a killing at the time of listing.
2) Lured by the benefit of leverage, a lot of people will make a partial payment and will end up with a non tradable ‘OPTION’… hence reducing the supply of shares. Remember it makes perfect sense to sell the shares when the supply is restricted and you would not like to miss this opportunity

Why Partial Payment:
1) Lure of leverage… (buy more than the amount of cash in hand) One of the reasons why I am rethinking my old strategy to invest in IPOs is because of the huge amount of capital that gets blocked for 20 days.
2) Long term investment… ICICI will 6 months time for investors to convert the partially paid shares into full shares. So I can effectively hold 95K worth of shares for 6 months by blocking just 25K (sounds tempting??)
3) Over subscription: If the company allows you to pay only 1/3 of the cost upfront and the issue gets oversubscribed 3 times…. well you will get 33K of shares by paying 33K instead of the full 1L.

Typically IPO are considered safe bet for retail investors.
1) You always apply at cut-off (which means you do not have to spend a lot of time doing research about what the allotment price is)
2) There is a 35% reservations (yes Indians love reservations)…
3) You can expect some listing gains.

But recently I have started questioning my investments
1) A good issue gets oversubscribed 30-40 times .. and very good ones even more.
2) Your capital gets blocked for 20 days (almost a 550/- interest lost on a 1L application)
3) If by mistake you apply in a bad IPO, you will not only get 100% allotment, but it will also list below the issue price.
4) If by stroke of luck you get an allotment, it would be of 6-7K worth… Now this is so small a piece of pie for me to track.. so either I need to shell out an additional 20-25k to make it sizable or get rid of the allotment on the very first day Hence defeating the very purpose of application.

For the past 1 year, i used to keep 1L aside for IPO applications. But since I got 1L straight refund for my last couple consecutive applications I am thinking of revisiting this strategy. From now on I won’t be investing in IPOs unless it is a mega issue.
What has been your experience with IPO?