Are IPOs really the wealth-destroyers?

Satyendra Bhardwaj

Few months ago, a big-ticket IPO (Initial Public Offer) was set to hit the Indian share market. There was euphoria all over the market, skilfully crafted and unleashed by that new age company’s management. The company was hailed as the torch bearer of “new economy”!
A 21-something boy who used to travel with me in a shared car was gung-ho over the prospects of that IPO and announced to me over a Noida to Gurugram trip, “You must also invest in this IPO. Everyone is using the service of that new age financial behemoth.”
While, I was amongst that minority who was not using its services, nonetheless, he had a point.

Just fresh out of a League ‘A’ B-School and flush with money that comes with stellar placement for some, he was in no mood to listen to “conservative thoughts” i.e. financials of a company! Generation Z is after all fed on the staple diet of GMV and other such terms and conservative jargons like P&L etc. are mocked upon, they are least bothered about eternal truth that is the “bottom-line”!

Some 15-days down the line, when we met again during the ride, he looked sombre, but was hard-pressed to express his ‘mistake’. The IPO wherein he had invested a large amount was down 40 per cent and he had lost a significant amount. I could understand his state of mind, so just told him that he was not the only one, but in future he must first look into the financials of a company than be swayed by the euphoria! After all, nobody is accurate from day 1 in the market and we all learn by committing mistakes!

It is not that IPOs always suck out your money; there are umpteen examples of IPOs giving hefty returns, but more often than not the IPOs have proved to be wealth-destroyers than the wealth-creators!

According to a research, 543 companies that have raised money via IPO route during the last decade, a little over 62 per cent no longer exist! About seven per cent of them somewhere between 50 to 90 per cent and 15 per cent companies are trading below their offer price. Essentially, only about 16 per cent companies have proved to be the wealth creators!

Contrary to the picture of last decade, if one looks at the performance of the recent IPOs/OFSes launched in 2022 so far, six out of seven offerings from the mainboard have proved to be wealth-creators, generating a profit in the range of 21 to 176 per cent till the date of writing this piece (April 14, 2022). As for the SME board, 27 companies have raised the money and 19 of them have generated the profit between 2.9 per cent to 220 per cent!

People often quote American investor Warren Buffett that it is the seller who decides when to come to the market, and that time more often is not favourable to the buyers i.e. retail investors! But, is that really so?