Long-term losers

By definition, subscribers to an IPO of an unlisted company face greater risk than in buying shares listed on the secondary market for a substantial period.

It doesn't matter how tight accounting and reporting standards are. There is always more information available about an already-listed company.

Naturally the market implicitly demands a higher return for that extra risk. The only way to fulfil that expectation in the short-term is to create an impression that the IPO is under-priced and likely to appreciate immediately on listing.

An impression of under-pricing can be achieved through genuine under-pricing. It can also be created through hype and adroit media-management.

The possible combinations of pricing and hyping decisions raise interesting questions of ethics. If the promoters deliberately under-price, they cheat themselves.

If they hype excessively while pricing excessively, they cheat the new minority shareholders. If they price at reasonable valuations while hyping excessively, they are still misleading the public.

When already-listed companies offer new shares, the situation is clearer with respect to valuations. One has a better understanding of management-capability and it's possible to come through with more accurate estimates of likely shareprices post-subscription.

In an age of book building and price auctions, everything is several degrees fuzzier. The prospective investor is left groping in the dark trying to figure out the nearest approximation to the issue price before he can even start guessing at the likelihood of appreciation over time.

If one applies the higher-risk-higher reward principle, the returns from an auction-led IPO ought to be even higher than from a fixed-price IPO, which in turn should exceed returns from the secondary market. I'm not sure that the extended return-risk relationship holds across entire business cycles.

The pertinent data isn't easily available and the process is still too new to rely to project current trends across entire cycles with certainty.

If the higher-risk-higher reward principle doesn't actually hold, then bidding for IPOs is a mug's game. It's like shooting for multiple returns on the roulette table or buying lottery tickets "" both situations where the odds suggest the gambler will be a consistent loser in the long run.

Prudence suggests investors should divide resources between secondary and primary market. Yet, there are investors who concentrate totally on IPOs. Some do it selectively but most IPO players believe in the buckshot principle and apply for all stocks on offer.

The process of valuation gets really fascinating when the business in question is also intrinsically difficult to evaluate or compare. There will be several such issues on offer this year.

Biocon is tough to evaluate "" even scientists in the field find it difficult to assess biotech companies, which are necessarily secretive about research focus.

Power Trading Corporation is in an entirely new line of business and could face serious competition. Dredging Corporation of India could see strong growth if Sagarmala, et al, get off the ground. It could also see competition and the financials are nothing exciting.

One really wishes that there was some method of regularising the grey market in yet-to-be listed shares. It would legitimise a useful price-discovery mechanism, which makes investment decisions easier. It wouldn't be difficult to set up grey market terminals. But of course, Sebi would have heart-failure.