Listing Myth

Lots of investors who may have subscribed to the IPO are under the impression that they strike goldmine when IPO lists at premium.But this may not be entirely correct because return on investment in an IPO is not only dependent on the debut premium but also on oversubscription.This can be better understand by following example.

• Suppose a person invest Rs. 1 lakh (the cap for small investors) in two IPOs,EVERONN Systems and DLF


• Everonn Systems' share closed with highest premium on day 1,while otherwise was the case in DLF (issue price for both companies was RS 100 per share)


• By investing Rs 1 lakh in Everonn systems' IPO the investor would have effectively applied for 714 shares


• But due to 123.80 times oversubscription, he would have been allotted only six shares.The profit on day 1 would be Rs.338 per share (difference between close price & issue price ) The investor would have made profit of Rs. 2041(Rs338*6 shares). The ROI in this case is just 2.03%


• On the other hand,when investor puts Rs. 1 lakh in DLF IPO,he would have applied for 190 shares and got full allotment of 190 shares because retail portion was subscribed just 0.97 times The profit on day 1 would be Rs 45 per share Means,investor earned total profit 8550(Rs 45*190 shares).The ROI in this case is 8.55%

This means,besides listing premium oversubscription has an impact on investors' return on investment

Source : "Capital Market" Aug-Sep 2007