Every loss isn146;t a scam

In the dictionary of Indian investors, 8216;scam8217; is just too accessible, too ubiquitous, too pregnant a word that8217;s too freely u...

In the dictionary of Indian investors, 8216;scam8217; is just too accessible, too ubiquitous, too pregnant a word that8217;s too freely used. We could use rip-off, fraud, swindle and so many other equally-strong, equally-clear, equally-appealing words, but nothing beats 8216;scam8217;. It has a crispness to it that not only communicates the meaning accurately 8212; a financial wrongdoing by a market participant that leaves thousands of investors poorer 8212; but does so in a highly emotive way.

In the minds of the same investors, the three letters I, P and O, when put together, create some sort of a visual chain of thoughts that reads 8212; put money now, wait a month, pull double the money out, wait for the next IPO.

If after waiting for an IPO to list, the price of the share does not rise, we begin to hear the first whispers of a scam 8212; such and such company came to the market at Rs 100 and since the price is Rs 98 and we did not make money in one month, there is a scam 8212; the market is rigged, manipulators are having a field day, companies are taking investors for a ride, small investors should never buy IPOs.

This thought is gaining momentum today and the reasons are clear. According to Prime Database, every third public issue is quoting at a loss. Of the 13 issues since January, which have raised Rs 7,467 crore and have listed on NSE or BSE, investors have lost money on four 8212; Punjab National Bank down 6 per cent, Jaiprakash Hydro-Power 9.5 per cent, 3I Infotech 5 per cent and Shringar Cinemas 9.4 per cent. Go back a little further to January 2004, and of the 42 public issues that have raised Rs 34,540 crore since then, nine are quoting below offer prices 8212; every fifth issue has given investors a loss.

But all it means is that the price of a share did not rise to expected levels. Besides, for every share whose value has fallen, there are four whose prices have risen. The average return on offer price for the 42 companies is as high as 68 per cent. Meaning, if an investor had put in Rs 1,000 in each of these companies, his investment of Rs 42,000 would be worth more than Rs 70,000.

To put that in perspective, it would take eight years to get to Rs 70,000 if the money was invested in a 6.5 per cent fixed deposit and 15 years if it8217;s kept in a 3.5 per cent savings bank account 8212; a place where 44.5 per cent of Indians park their money according to Indian Retirement Earning and Saving database, a survey recently released by the Ministry of Finance.

Also, investors going in for equity shares should know that accompanying such high returns is the equally high risk. Interestingly, the risk in the case of these 42 IPOs is pretty low 8212; at the time of writing, while the average return on all the companies is 68 per cent, the average fall of the nine companies works out to just 15 per cent. By all indications, investors have made money from these IPOs.

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Another question bothering many investors is whether these IPOs are overpriced 8212; are companies riding the current boom to loot and scoot with investors8217; money that they8217;re raising at sky-high prices? As per the data, at 22 times, the average price to earnings PE multiple on companies8217; offer prices in 2005 is the highest in this millennium 8212; next comes 2003 at 19.2 and 2000 at 16.4.

But that hasn8217;t stopped Jet Airways or Gateway Distriparks that came riding very high PEs from quoting even higher post-listing. On the other hand, companies with humbler PEs like Shringar Cinema or PNB are quoting at discounts to their offer prices and many like Allahabad Bank are close. There seems to be no relationship between PEs and market performance.

What needs to be understood is that while households invest in IPOs to make money, companies offering the shares have the same objective. Investors want the maximum return on investment, companies seek the highest price for their shares. These two economic agents meet in a place called the market, where watchdog Sebi ensures disclosures are in place and prices haven8217;t been manipulated during an FPO follow-up public offering, and a transaction takes place.

Unlike his father8217;s time, when the Controller of Capital Issues guaranteed super-normal returns from IPOs through underpricing, today8217;s IPO investor has to have three virtues accompanying him when he goes to the market 8212; the ability to research a company, the patience to wait for returns and the stomach to deal with volatility. Yes, in the market there will always be some swindlers. But every loss isn8217;t a scam.