IPOs fail to enthuse retail investors

Subscriptions crash from 19 per cent in 2004 to only 3 per cent.

In spite of the revival in the primary market, retail investors are treading cautiously when it comes to investing in initial public offers (IPOs).

Going by retail numbers in some of the IPOs that were up for subscription recently, one can clearly see that the recovery story has not been bought by them.

Retail subscription to IPOs in India has ebbed to its lowest in the last few years on the back of the global financial turmoil. An analysis of IPOs between 2004 an 2009 to date shows that average subscription has dropped dramatically from 19 per cent to 3 per cent. Retail investors, who used to be major participants in IPOs in 2006 and 2007, have almost disappeared from the primary market.

The myth that large IPOs get better retail subscription too has fallen flat in case of some of such recent offerings. Sample this: NHPC, which was the largest public issue so far this year, got QIB subscriptions of 29 times, while the retail portion was subscribed only 3.1 times. Similarly, Adani Power, which raised Rs 2,200 crore, saw its retail portion being subscribed by only 2.65 times.

The smaller ones obviously fared much worse.

Raj Oil Mills was subscribed only 0.64 times, followed by Edserv Softsystems and Excel Infoways, which were subscribed 0.98 and 1.65 times, respectively.

"It is true that retail investors have not shown a great appetite for public issues this year, but that is more to do with their cautious approach and volatility in markets. Retail investors are always the last to enter. Once there is a clear picture on economic recovery, they will be more inclined to invest. Having burnt their fingures in the crash, there is apparently a lack of confidence among them,” said Munesh Khanna, CEO and managing director of Centrum Capital.

IPOs in 2006 and 2007 had seen an average subscription of eight times and 14 times, respectively. The issues of Religare Enterprises had managed an exceptional subscription figure of 89 times. Even the Reliance Power IPO, which proved to be a precursor to the market meltdown of 2008, was subscribed 14 times by retail investors.

"We are not going to see such insane subscription figures of the past as those were driven by the peak valuations of that time. Investors will now think twice before taking the plunge, and it is in the interest of the primary market," said an investment banker, who did not wish to be named.

The Securities and Exchange Board of India (Sebi) has been focussing a lot on primary market reforms with the regulator outlining ASBA (application supported by blocked amount), wherein the investor's funds will leave his bank account only upon allocation of shares in public issues.

"Domestic growth stories with reasonable pricing will always find investors. Having said that, it will take some time before retail investors actually take the plunge. Once we see a full revival, the confidence of retail investors to invest in IPOs will return," said Rajiv Dalal, partner, Ernst & Young.