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January 14, 2018

The Secret Of Making Money From IPO Subscriptions

When companies wish to raise funds and offer their ownership in the form of shares to people, its called IPO aka Initial Public Offerings. IPO is also an excellent opportunity for retail investors. Though Warren Buffet never supports investment in IPO, I believe there is no harm in investing a small amount (nearly 15K) for a great chance of making money.

Once SEBI approves IPO, company publicizes its information which would be as follows.

Amber Enterprises India Limited IPO Detail

During an IPO, Investors are categorized under

  1. Qualified Institutional Buyers – Financial Institutions, Banks and Mutual Funds registered under SEBI
  2. Non Institutional Investors – Individuals and NRIs who invest more than 2 Lakhs
  3. Retail Individual Investors – Individual investing lesser than 2 Lakhs ( basically us)

What would be a minimum investment from Retail Investors?

The minimum investment would be market lot offer price; where offer price is decided averaging prices in applications from investors and number of shares in a market lot is chosen by the company. If the Issue is oversubscribed, the offer price would be the highest price in price band. So, if Amber Enterprises is oversubscribed, the minimum investment would be 17 x 859 = 14603. And since it is oversubscribed, maximum allotment to retail investors is only one market lot, and so the maximum investment is also INR 14603. 

How to apply? 

If you are a Retail Investor, all you need to have two things; a bank account and a demat account. Your bank account need not be linked to the demat account.  You have to go to IPO Application section from your internet banking dashboard and apply using DP ID ( 16 digits). The minimum investment is always something around 15K. The amount will be locked from your bank account. It will be released if Shares are not allotted and deducted if allotted. You can trade the shares after it gets listed.

Allotment of shares – A game of probability 

Let’s suppose a company decides ten market lots for it’s IPO and 100 people applied for it. In this scenario, the issue is oversubscribed by ten times.  Shares will be randomly allocated to 10 people, and the probability of getting one lot would be only 10%. Now suppose if five people decide to invest together and thus come to a conclusion that if any one of them gets the allotment, they will divide the profit among each other. So, the probability of allotment to one or more person from the group increased to 41%. And so the chance of you making money has also increased substantially.

I don’t want to confuse you with the process of calculation but here is a simplified formula

Probablity of allotment = 1 – {1 – a/b}^c

a= number of market lots
b= number of total applicants
c= number of friends

Formula computed with the help of Chandan Kumar and Kumar Abhishek.

You have to be cautious with this strategy as it involves trust and tax calculations. If you are the person who received the allotment and selling it before one year, you will end up paying 15% of your profits as a short-term capital gain tax. So before dividing profits, deduct the tax out of it.

IPO Performance in 2017

In the year 2017, 38 companies went for IPO.
Out of these 38 companies, 11 companies have currently given losses with the maximum loss of 43%.
22 companies have given profit above 20% with a maximum contribution of 355 %. This means if you have invested 100 rs in each IPO since the beginning of 2017 you would have made approx 2270, i.e., 60% profit. Sweet! Isn’t it?

Net return after allotment

Average Monthly Return

 

If you hear in the news that an ABC company has been oversubscribed 8.5 times, it means for every ten market lots there are 85 people to apply. So the formula can be rearranged as

Probablity of allotment = 1 – {1 – 1/s}^c

c= number of friends
s= number of times an issue is oversubscribed ( s = 1 if issue is undersubscribed )

Let’s observe the subscription rate of top 5 Winners and 5 Losers in the Retail segment.

Top 5 Winners Number of times Subscribed Profit %
Apex Frozen Foods Ltd ( 4 months) 8.5 354.86
Avenue Supermarts Limited (10 months)  7.3 313.72
Shankara Building Products Ltd ( 9 months)  15.35 272.61
Salasar Techno Engineering Ltd ( 6 months) 59 198.15
Astron Paper & Board Mill Ltd ( 1 month) 73.3 192

 

Top 5 Losers Number of times Subscribed Loss %
CL Educate Ltd ( 9 months ) 1.63 -42.83
S Chand and Company Ltd (8months ) 6.07 -22.84
The New India Assurance Company Limited (2months) 0.11 -22.25
IRB InvIT Fund (8 months) 5.89 -14.71
General Insurance Corporation of India (2months) 0.63 -12.29

(months since listed)

Looking at this small sample data, from a bull period of the market (2017), it’s quite certain that stocks with over six times subscription rate have outperformed others. For better clarity, I may have to work around more numbers to get myself in a better position to analyze. Maybe in another blog, but today the winner is IPOs. Do subscribe to my newsletter for getting information on upcoming IPOs with a potential of the great chance of making money.

More analysis on listing gains on IPOs will be published soon in another blog post.

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One Comment on “The Secret Of Making Money From IPO Subscriptions

Asif
January 15, 2018 at 4:07 am

I am at a loss if I am not applying for an IPO. Meanwhile, I am curious to know how to select good IPOs from bad ones. Is subscription rate should only be the selection criteria?

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