IPOs have left 22,000 crore on the table for investors

The underpricing of initial public offers has helped enrich investors by Rs 22,314 crore in a period extending over roughly a decade.

Underpricing has been defined as the difference between the offer price of the IPO and the prices on the day of listing when price discovery happens in the market place. Business Standard examined data stretching back across 454 issues starting from January 2004 to the present day. Companies raised Rs 1.78 lakh crore during the period.

Each issue raised an average of Rs 394 crore. The average gain works out to Rs 49.15 crore. Thus, the average discount on such IPOs translates to 12.47%.

A study at an American University pegged the figure for money left on the table by US IPOs between 1980 and 2012 at $135 billion.

The report entitled, ‘Initial Public Offerings: Updated Statistics’ and authored by Jay R Ritter, Cordell Professor of Finance at the University of Florida examined 7,706 IPOs.

In the United States, the amount of underpricing is said to have invited regulatory scrutiny since investment bankers have the discretion to allot shares to whichever entities they want.

“…Investment banks managing an IPO can provide IPO shares to their favoured clients in exchange for future business…” noted a paper entitled ‘Anchor Investors In IPOs’ authored by Amit Bubna, Assistant Professor of Finance at the Indian School of Business and Nagpurnanand Prabhala, Associate Professor of Finance of the Robert H Smith School of Business at the University of Maryland.

In India, there is no discretion in the allotment process. The allotment to institutional investors was done on a discretionary basis before 2005. This was changed in September 2005, and now all allottees are given shares on a proportionate basis, according to a Sebi primer on public issues.