Why you go for an IPO? Because everyone is doing that. You get oversubscription several times, the demand looks crazy and you expect a great listing gain. Listing day comes and your stock falls below the issue price. Surprising? Indeed. However, a highly-subscribed IPO doesn’t guarantee a good listing or positive dynamics of your share after listing. Subscription figures reflect demand at the IPO stage, whereas the price after listing depends on the value of the company set by buyers and sellers in the free market.

Let us look at some factors which could influence the fall of the share after listing.

Subscription Numbers Don’t Always Reflect Long-Term Demand

When an IPO is oversubscribed, it means that the volume of stocks which investors asked for exceeded the actual number of issued stocks. It doesn’t always mean that all those applicants will hold the stock for a long time. There are people who apply for listing gain only. There are people who will sell the stock right after listing when its price becomes equal to expected one. So your IPO could be very demanded at the subscription stage and still have many sellers after the listing.

The Share Price Set During the IPO Is Already Costly

This is among the major considerations when investing in an IPO. Although the stock may be highly popular, its price may not necessarily be reasonable. For instance, let us assume that there is an IPO that investors think has great growth potential and they are prepared to purchase at a high valuation. Once the hype dies down, the investors may decide that the earnings of the company do not justify the price. Consequently, the price of the stock will fall despite the company being stable because of increased demand for the share.

Grey Market Premium Not an Indication of Listing Price

Prior to listing, investors are always concerned about the GMP of the stock as a determinant of future listing performance. However, this is not the case since the grey market is not the same as the official stock market and should not be considered as a listing price. There are different dynamics that may determine the listing on the day of listing.

Listing Day Presents Another Market

At the time of IPO, the stocks were purchased by the investors at a set issuance price. After listing, the stock would be present in the secondary market wherein the price would vary continuously depending upon the demand and supply. This is where the big difference lies. The investor who had decided to subscribe the shares at ₹500 in the IPO may or may not be willing to buy the stocks at ₹600 after listing. When more people wish to sell the stock than wish to purchase at the existing price, the stock will fall.

Profit Taking Can Put Selling Pressure

Let us suppose that an IPO has been allotted to thousands of investors and listed at a premium. Now some of these investors may choose to take profit from their investments. When too many investors act in this manner simultaneously, there can be downward pressure on the stock due to the selling pressure. This is especially true when many investors who participated in the IPO have done so for short-term gains.

Market Conditions May Drown Out the IPO

An IPO does not operate in isolation. In case the entire market takes a nosedive on the listing day, even a fundamentally solid company can come under selling pressure. Issues such as interest rate expectations, geopolitics, activity in other markets, industry problems or negative investor sentiments can weigh down on the stock. While the company appeared to be good during the opening of the IPO, market conditions at listing time could be very different.

The Company’s Fundamental Qualities Continue To Matter

After the hype dies down, the investor focus shifts to the underlying business fundamentals. Issues such as these become critical for investment:

• Is there consistent growth in revenues?
• Are the profits sustainable?
• What is the level of debt with the company?
• Are the cash flows healthy?
• How strong is its competitive standing?
• What are the growth prospects in the future?
• Is the valuation reasonable?

In case the investors discover that the growth potential was overstated or the valuation too rich, there could be a stock correction after listing.

Successful IPO and Good Listed Stock Performance are Two Different Things

Highly oversubscribed IPO could be seen as a success from the point of view of the fundraising process, but that doesn’t necessarily imply that the share will perform well after listing. Those are two separate questions:

• IPO: How much demand did the company get at its issue price?
• Listed stock: At what price people want to buy and sell this stock?

The first gives insight into the demand during the offering process. The second one indicates current market expectations. For this reason, it would be wrong for investors to take subscription number as the only factor when deciding whether to apply or not.

What Should Investors Look for Before Submitting Their Application?

Rather than just counting the subscription ratio, investors need to look into company’s financial performance, valuation, indebtedness, IPO proceeds usage, competitive position and risks. Furthermore, they need to think whether they would like to own this stock even if it doesn’t provide listing gain. This is a very important question because an IPO should be viewed as an investment in a business and not as a chance to make a quick profit at listing.

A Popular IPO Isn’t Always a Good Investment

The IPO with heavy subscriptions may yet go down upon listing since the subscription only shows the demand at the time of the IPO and not necessarily what will be the performance of the share in the future. The high valuation, the desire for profit taking, changes in market sentiments, the lack of demand following the listing, among others, could cause the share to drop to below the issue price. Hence, it is not wise to think that the IPO is a sound investment just because it has been oversubscribed. Instead, before subscribing to the IPO, try to consider whether the business and financial performance of the company make sense.

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FAQs

1. Does high IPO subscription guarantee listing gains?
   No. Subscription indicates demand during the IPO but does not guarantee that the stock will list above its issue price.
2. Why can an IPO list below its issue price?
   Weak market sentiment, limited buying demand, aggressive pricing, profit booking or concerns about the company’s prospects can cause the stock to list below its issue price.
3. Is a high grey market premium a guarantee of a strong listing?
   No. GMP is only an informal market indicator and shouldn’t be treated as a guaranteed listing price.
4. What happens after an IPO is listed?
   The shares begin trading in the secondary market, where the price is determined by buying and selling activity and changes continuously based on market demand and expectations.
5. Should I apply for an IPO just because it is heavily oversubscribed?
   No. Consider the company’s fundamentals, valuation, growth prospects, risks and your investment objective rather than relying only on subscription numbers.