Withdrawn IPOs: Trick or treat?

Of late, Initial Public Offerings (IPO) have given investors more pain than gain. Not only were a few  withdrawn after accepting money from investors, some had a terrible listing on the stock exchange too.

Till some time back investors would blindly invest in any IPO and exit on listing thus making some quick money. Many might have enjoyed this 'flipping' game but in the present scenario only fundamentally strong companies have stood the market crisis. And hence it is no surprise to witness a few companies withdrawing their IPOs such as Emaar MGF and Wockhardt where the fundamentals looked weak. So, what else was the reason behind this failure?

Overvalued price: Investment banks, promoters and even IPO rating agencies have tried to sell stone for the price of gold by giving most IPOs a grade of four on five.

I feel extremely bad for investors who applied for these IPOs. Not only did their money get blocked but they also lost the opportunity to buy cheap undervalued stocks available in the market.

I feel that companies that have withdrawn their IPOs should be penalised either by making them pay a fine or at least giving compensation to the investors.

Promoters need to realise that the IPO market is a serious platform. Companies and institutions are not just built on profits but on trust and faith. And once the trust is broken, it is very difficult to rebuild it. 

What's worse is that promoters and investment banks are not even apologetic about what they have done. Instead they are blaming the market sentiments and investors. I do not believe in the fact that these IPOs were withdrawn because of poor market conditions. The reason why they got a poor responce was because of their overvalued price. Had the pricing been logical and fair, people would have surely invested. This can be said from the fact that the IPO of IRB Infrastructure Developers was subscribed over four times in the same market conditions.

Should you still invest?

These companies have plans to issue their IPOs again once the market bounces back in the next few months. I don't know if they would come back with a reduced price but in any case I wouldn't be comfortable in subscribing to their IPOs anymore. Investing money in a company that took investors' money for a ride is not at all inspiring.

Values and ethics are very important in any business. And when this itself becomes questionable I might as well find different avenues to make money.

What should you do?

Look before you leap and learn to take informed decisions. When I think about these IPOs it makes me wonder if they really needed such huge capital or if it was an unrealistic plan. I don't know how many investors in future would apply in these companies. Atleast I wouldn't. Instead I would look for several other undervalued stocks that will give good returns in the coming few years. 

Had it not been for their greed, both Emaar MGF and Wockhardt IPOs could have witnessed a success story. And when it comes to investing in the stock market, it's about playing the cards well and of course not succumbing to greed or fear factors. So, the next time you decide to invest in an IPO you know what to look for.

Happy wealth creation!

Yogesh Chabria, investor and author, dreams of empowering every Indian retail investor with knowledge, and wants to create as many 'happionaires' as possible. Connect with him through http://www.blog.happionaire.com/ , a blog dedicated to his soon-to-be-launched book. Also, subscribe to his free newsletter.