Most IPO investors lost money; valuations far from 'fair'

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A staggering 60 percent of the investors who bought shares in initial public offerings over the decade since April 2003 have lost their money amid valuations far from being "fair", says a report.

Noting that performance of IPOs over the last 10 years does not inspire investor confidence, proxy advisory firm IiAS said that valuations for such sales were far from "fair". An analysis of 394 IPOs -- made between April 1, 2003 and July 31, 2014 -- showed that only 164 companies were currently trading above the offer price, which is 42 percent of the total such offerings.

"... returns from investing in IPOs have been dismal over the past 10 years. About 60 percent of investors lost money, and on the whole, investors were better placed investing their money in fixed deposits," IiAS said in a report released on Monday.

The findings also come at a time when many companies have lined up plans for initial share sales. According to the firm, if one is to go by past trends, there is more than a two-third chance that investors would have made higher returns by investing in fixed deposits rather than in IPOs.

"Of the 164 companies that are currently trading above the offer price, the returns are not significant: in 20 percent of this set of companies, investors would have made higher post-tax returns by investing in fixed deposits rather than these IPOs," the report noted.

IiAS said the analysis is being made during a bull run, as the markets have moved up 30 percent in the past one year. "Were this analysis based on market prices a year ago (with January 16, 2014 price data instead of January 16, 2015 data), 245 (or 70 percent ) companies would have been quoting below their offer price," it said.

Observing that investing in IPOs is like a game of chance, the report said that investors are craving for genuine price discovery.

Out of the 20 public sector companies that came with their initial share sales since fiscal 2004, four entities' scrips were trading below their issue price as on January 16. These companies are MOIL, NHPC, Punjab & Sind Bank and United Bank of India, the report said.

Besides, IiAS said that shares of 25 companies that raised money through IPOs between 2004 and 2013 have been suspended for either procedural lapses or as a penal action.

"More worrying is that over 70 percent of the companies reported lower net profit margins and return on equity ratios than in the financial year in which the shares listed. "This would have more likely lowered their valuations, independent of any market run-up," it added.