Do IPOs offer an advantage to investors over secondary markets?

A large number of retail investors are still plagued with doubts about IPOs. Should they invest through IPOs or should they stick to the secondary markets? Are there any advantages in investing in IPOs over secondary markets, since both are equity investments after all? While there are no simple answers, there are certainly some advantages you can get by investing in IPOs.

Sep 29, 2021 08:09 IST India Infoline News Service

Over the last 1 year, the Indian IPO markets saw robust demand. Since Jan-21, IPOs have raised Rs78,500cr, including the Brookefield REIT issue and the Powergrid INVIT issue. If you just look at the first 6 months of the current fiscal year, IPOs collected nearly Rs60,000cr, including the Aditya Birla Sun Life AMC IPO which opens on 29-Sep.

A large number of retail investors are still plagued with doubts about IPOs. Should they invest through IPOs or should they stick to the secondary markets? Are there any advantages in investing in IPOs over secondary markets, since both are equity investments after all? While there are no simple answers, there are certainly some advantages you can get by investing in IPOs. Here is a quick dekko at some of these unique IPO advantages.

You get access to top quality unlisted stocks

If you just look at the last few years, there are a number of marquee companies that have come into the stock markets through the IPO route. Here are some stand-out examples. L&T Infotech is a 9-bagger since its IPO in July 2016. Teamlease is a 5-bagger since January 2016. Dixon Technologies has been 12-bagger since September 2017 while CDSL has been a 10- bagger since June 2017.

The high profile Avenue Supermarts, which owns the D-Mart brand is a 15-bagger since March 2017. The IPO of Affle has been a 7-bagger in 2 years while IndiaMart has been a 9-bagger in the same period and IRCTC has been a 10-bagger. A stock like Happiest Minds is up 8-fold in just the last 1 year. If you look at 2021 IPOs, Nureca and Laxmi have been 4-baggers in the last 6-7 months.

In an IPO, the merchant bankers and the issuers try to attract maximum buying interest. Hence, the endeavour is to leave something on the table for investors. That is where the biggest benefit comes to you from the IPO. While you can buy these stocks in the secondary market, the price would be much steeper.

IPOs give access to quality PSU stocks

The PSU stocks may not be the darling of the markets but some of them have done really well. For example, this year, two major divestment issues of BPCL and LIC are expected to hit the market. In the last few years, the primary markets gave access to the shares of high quality companies like Hindustan Aeronautics and Cochin Shipyards. Of course, Coal India in 2010 still remains the largest IPO ever.

Divestments were a lot more aggressive in the pre-2007 period and one of the classic examples has been the divestment of Maruti in 2002, which went on to become a 100-bagger over time. These IPOs give access to such quality paper of top class PSU companies.

IPO norms tilted in favour of small investors

If you are a retail investor, then you have a huge benefit in that the allotment process is designed to ensure that maximum number of applicants get allotment. This normally works in favour of the small investor. There are quite a few such measures favouring retail investors. In most PSU IPOs, retail investors are eligible to get a discount over the issue price applicable to HNIs and institutions. Secondly, even within the retail quota, small investors get higher allotments since the focus of SEBI is on broadening the retail ownerships.

SEBI has streamlined IPO regulation and IPO processes

If there is one area where SEBI has placed a lot of accent in fine tuning processes and ensuring safety, it is in primary markets. Crunching the time to allotment and listing has impelled companies and investment bankers to fine tune processes. They also follow higher standards of disclosure and transparency. This has made IPO markets more professional and safer for the retail investors. In the secondary markets there tends to more of information and noise but limited insights. IPOs manage to squeeze all the intelligence pertaining to the company into the prospectus.

Interestingly, IPOs are about information symmetry

What exactly does this information symmetry mean? Most secondary market stocks are tracked by institutional investors, analysts and insiders. Some are even over-tracked. These institutions and analysts have an edge in terms of information access. IPOs are not tracked by analysts so the only source of information is the IPO prospectus. Therefore, in terms of information symmetry, retail investors are at par with analysts and institutions. This is unique to IPOs.

ASBA makes IPO investing very economical

Retail investments in IPOs are routed through ASBA. Applications Supported by Blocked Amounts (ASBA) ensures that the amount is only blocked to the extent of your application. The actual allotment amount is debited to your bank only after shares are allotted. Small investors do not lose interest on unallotted portion and so it works out more economical, although access to the funds are still restricted.

In the last 1 year, IPOs as an asset class have outperformed the Nifty and Sensex. However, there is no empirical evidence to testify that IPOs have done better than secondary markets under all market conditions. However, IPOs do proffer some unique advantages.

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