INVESTMENTS IN IPOS IN THE INDIAN CAPITAL MARKET

The existence of the phenomenon of “underpricing” is a well-established fact for the common stock initial public offerings (IPOs). Research concerning the primary capital market is found to be unequivocal in its conclusion that initial public offerings are offered at a discount. It has been found that an average firm goes public with an offer price that is lower than the price that prevails in the immediate aftermarket. As a result, IPOs register significant excess returns on the first day of trading. Underpricing is a phenomenon that is largely restricted to the opening transaction. And hence, the underpricing is almost entirely “corrected” by the market at the opening transaction. A worldwide survey of literature on the phenomenon of Underpricing of IPOs exhibit three fundamental characteristics: (a) the initial price reaction phenomenon or in other words ‘underpricing’: the immediate after market price, on average is significantly higher than price at which the initial offer was made; (b) the Hot Issue Phenomenon: there are distinct cycles outlined, both in the number of issues that come to the market and the level of initial price reactions; (c) the long-run “Underperformance” phenomenon: initial offers are said to perform dismally in the long-run compared to the industry counterparts for the same period.