It was almost a slag of 3 years the Initial public Offerings (IPO) was out of fashion in the Indian markets. Now they are back, so are blogthe bulls back on Indian bourses? Yes they are. How long they will last? I don’t know.

The Wonderla IPO was subscribed over 38 times on the final day of bidding, next in line: L&T Technology Services and L&T Infotech, Bharat Business Channel, Hindustan Aeronautics Ltd, Tarini International, Manpasand Beverages, Adlabs Entertainment, Quick Heal to name some.

Have done series of posts the IPOs as they are controversial in nature.  The paper by Pitchard “Initial Public Offerings (IPOs) must simply be abolished” is worth a read.

Well IPOs are always overpriced?  This argument about IPO pricing appears like another case of people misunderstanding primary and secondary markets. As you know primary markets are where companies raise capital for future investment. Secondary markets are where savers allocate their funds into securities that are exchanged. No money goes to the company on a secondary market. From a pure economics perspective, you are not investing in secondary markets. You are just allocating your savings in securities tied to the corporation’s performance. It’s not unlike opening a savings account where the bank buys very safe short duration securities. You wouldn’t call this an “investing account”, would you? Of course not, that would imply a level of risk that might make you feel unsafe.

 Wall Street – Dalal Street does the same thing with “investing” which is supposed to be synonymous with “get rich”. You get the picture. Its word games and we’ve all swallowed it up…hook, line and sinker.

But the whole point of an IPO is to overprice the offering. Granted, I am using “overpriced” rather loosely here, but what I mean is that it is the goal of the corporation (and its underwriters) to sell you as much stock as possible. The entire purpose of the IPO is to raise as much capital as possible. They are not doing the market some grand favour. The company is not trying to get you a sweetheart deal so you can flip the stock 30 minutes later at a higher price. The corporation is being greedy. It is trying to sell you as much stock as you’re willing to buy as long as you’re willing to fork over the cash that will result in them being able to leverage up their operation so they can multiply profits.

You see, corporations don’t have 30 minute trading timeframes. Despite their sombre commentary after the fact, the company does not care that you lost money buying their shares 3 months ago. Why? Because the company did not raise capital so it could survive for 3 months. It raised capital so it could survive for 30 years or 30 lifetimes. If you’re a trader who got burned in a recent IPO because you thought markets was throwing you a fat pitch then you’ve misinterpreted the entire purpose of primary markets. Even more so, you’ve misinterpreted the profit motive of the capitalists running the IPO.

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