Post the article – New Category of Issues – Managed written at Diwali 2010 time, I received emails asking me as to why do such issues come, why do investors invest knowing the credentials and so on. This article is to attempt some answers to the same and giving three recent examples.

There are typical characteristics to such issues. These issues have virtually no fundamentals and even if there are fundamentals, the asking price for the issue is exorbitantly expensive. The amount that is paid for managing the issue is always recovered from the investor and is therefore a part of the issue price. Such issues normally do not receive much of QIB subscription and are typically subscribed by HNI’s and retail investors. The grey market may or not may not be active and its presence is neither indicative of the issue being managed or vice versa.

Listing day is the execution day. Here the volumes are many times the issue size and depending upon the extent of distribution required one has seen a turnover of anything between 10 to 20 times the IPO size being traded. The idea is to trap people in either going long or going short. Once it is found that people have entered the scrip the manger of the share reverses his trade or completes the execution. For example, scrip which was grossly overvalued and the counter is heavily shorted by people, will see a sharp rally and will find people scurrying for cover by buying their shorts. In such a case, the job of the manger has been done. In another example of Shekhawati Poly-Yarn when the manger saw that people have gone long on his share, he just dumped it and the share hit lower circuits for many days thereafter.

The moral of the story is that investors must realise that there is no free lunch and money will be made by the manger as long as investors apply for such IPO’s and believe that they are smarter than the manger and will beat him at his game. There is no such guarantee and his tricks change from issue to issue.

Let us take three recent examples and see what happened.

Ravi Kumar Distilleries Limited
This issue was for 1.15 cr shares in a price band of Rs 56-64. The issue was horribly priced and there was no way a company could expect to get a price earnings multiple of between 68 times to 77 times when companies like Globus Spirits was available at 11.9 times. The issue was subscribed 2.22 times with QIB’s a mere 0.15 times, HNI’s 7.31 times and retail 3.01 times. On day one of listing the share saw trading of 11.73 cr shares or 10.2 times the IPO size. The stock after touching Rs 90.30 closed at Rs 80.05, a gain of 25%. The share made a high of Rs 93.95 and a low of Rs 28.30 on Friday. The share has closed at Rs 28.35, a loss of Rs 35.65 or 55.70%.

This company had come out with a fixed price issue at Rs 30 to raise Rs 36 crs by issuing 1.2 cr shares. The company is in the business of Texturised yarn and had a turnover of Rs 89.37 crs for the year ended March 2010 and a net profit of Rs 2.2o crs. The shares were offered at a price earnings multiple of 30 times when the company with which it was compared was available at just about 4 times. The issue was subscribed about 11 times and after withdrawals by HNI’s was subscribed just under 7 times. The issue created history and saw trading volumes of 22.44 crs on day one or 18.7 times the IPO size on listing day. The stock hit a high of Rs 69 at 3pm on listing day and the last trade in the next hour was at Rs 30.70. The manger dumped the stock and the price became less than half in a mere 30 minutes, trapping investors badly. The delivery percentage on that day was 3.38% while 63% of the IPO size got delivered. The next three days were spent in creating dubious history where the stock opened and remained at lower circuit crashing to a low of Rs 27.45 from a high of Rs 69. The stock closed on Friday at Rs 25.95

This is a really unique case where the company has already filed four DRHP’s before filing its fifth attempt which turned successful. The issue was subscribed 4 times with the QIB portion subscribed 0.35 times, HNI 4.68 and Retail 9.01. The company has not paid taxes since 2000-2001 and they are not under dispute. Its revenue for year ended April 2010 has been Rs 12.95 crs and the profit after tax was a mere Rs 3.93 lacs. The company wanted a market cap of 245 crs with a price earnings multiple of 6,230 times. This is not a typographical mistake but absolutely correct that the multiple asked was over six thousand two hundred times. The company raised Rs 60 crs at a price of Rs 70. The share has listed for a mere two days and the drama is yet to fully unfold.

Day one saw a turnover of 3.38 cr shares or 3.95 times the IPO size and net deliveries of 19% of the traded volume but 75% of the IPO size. The share has in a mere two days made a low of Rs 50.35 and closed at Rs 56.10. The loss so far is Rs 13.90 or 19.85%.

The lesson to be learnt is that this is a business for mangers. Why should we as investors allow ourselves to be used for their gains and lose in the process? If they make money and not at our cost so be it, but not that they make money at our cost. This is a game which is increasing and more and more gullible investors are getting trapped. It is an attempt by this website to warn investors and give a fair indication of what they are allowing themselves into by forewarning. Let’s hope that investors become wiser.