If you have tracked book-built initial public offers on the stock exchange Web sites, you would have noticed that retail investors typically rush in at the last hour.

This is because most lay investors are looking out for the subscription numbers for the QIB (Qualified Institutional Bidders) portion of the IPO, especially of FIIs, before they decide to take the leap.

Retail investors often rely on the extent of over-subscription in the QIB portion when deciding to invest or refrain from IPOs. This is built on the premise that FIIs have a much better understanding of new businesses or untested business models when it comes to evaluating IPOs.

Now for the detour. What if the big guys you were tracking were in the issue for the short term? What if they flipped on listing day itself, after securing the much-sought-after allotment?

Business Line looked up large transactions (bulk and block deals) that occurred on both the BSE and the NSE platforms for the 35 IPOs listed from mid-October. The evidence of institutional investors making a short-term profit on the day of listing (known commonly as 'flipping') was strong.

Of the 62 transactions (both buy and sell) that occurred on the listing days, 34 were "sell" trades. Of these, institutional investors exited the stock with substantial profits on 25 occasions.

The numbers may be small but the trend reveals that FIIs too have not been averse to taking a short-term view with their IPO investments.
Cashing in

Mauritius-based investment firms or arms of well-known investment banks feature prominently on the list of investors that made a killing on listing.

Right from BSMA (affiliate of Bear Stearns), Mavi Investment Fund (sub-account of Switzerland-based M.M. Warburg Bank) to less known entities such as Prime India Investment Fund, ITF Mauritius, Amas India Investments; all have been regular investors in IPOs, who have taken profits on listing.

Could it be the overall market mood that caused FIIs to rush in on the day of listing and cash in on their profits? Maybe not. True, the Sensex lost around 22 per cent in value since the first week of January, with many volatile ups and downs in between. However, even through this period, FIIs did keep up steady buying in shares of companies such as Maytas Infrastructure, Edelweiss Capital, Consolidated Construction Consortium (CCCL) and BGR Energy Systems, on Day One.

When it comes to a fancy for newly listed stocks, FIIs do not seem to be very different from the small investor.

Just as a small investor would try to buy shares in the secondary market for a company in whose IPO he/she did not get allotment, foreign investors too seem to follow this practice. This may partly explain the bulk deals in Maytas, Edelweiss, CCCL and BGR, whose issues were oversubscribed over 50 times during their IPOs!
Taking chances

What about other constituents of the QIB group who are allocated around 50-60 per cent of a company's net issue? Apart from FIIs, mutual funds and financial institutions, insurance companies also are included in this list.

An analysis of the reported transactions shows that domestic mutual funds have not engaged in 'flipping', as much as the foreign investors. They feature prominently in the buyers list on the day of listing, with funds such as JM Financial, Franklin Templeton MF, ICICI Prudential and HDFC MF actively engaged in buying shares.

India's largest bank, the State Bank of India, also seems to be a participant in the IPO segment, making quick gains with investments in IPOs of Barak Valley Cements and Renaissance Jewellery.

But could it happen that daily market movements too influence these deep-pocketed investors? They do not, as an analysis for the October-February period shows. 'Sell' transactions in IPO stocks were roughly the same in number whether the Sensex finished lower or higher on listing day.

While most transactions by institutions on listing day appeared to be motivated by the chance to make quick gains, a few also helped limit the downside. DB International, India Diversified Mauritius, Ultra India Mauritius, Deutsche International and Elara India Opportunities were some institutional sellers on day one, in stocks such as Empee Distilleries, KNR Constructions and Bang Overseas.

Their move to exit was well-timed, as each of these IPOs lost as much as 20 per cent on listing day. Cords Cable Industries was among the exceptions, which managed to close at a 3 per cent premium after listing at a discount.
What's in it for you

Many small investors take cues from strong QIB subscription numbers to subscribe to and project listing gains on IPOs.

Strong institutional interest during an IPO is taken as a sign that the stock may attract buying post-listing. However, if above trends are any evidence, it is possible that institutional investors too (at least a few of them) are in the game for the short term.

Remember the hype surrounding Reliance Power IPO? Overall, the IPO was oversubscribed 62 times, while the QIB portion was over-subscribed a massive 83 times. But the stock still closed Day One well below its offer price.

Although there is no record of bulk/block deals related to the Reliance Power stock on listing day, one must remember that quite a bit of institutional selling may escape the "bulk deals" net, if transactions are broken into smaller trades, thus escaping notice.

Apart from 'flipping' being a risky game (refer 'Flipping your stock is a risky game', Business Line, September 30, 2007), these trends are reason to take IPO subscription numbers with a pinch of salt.

Large investors too are driven by profit motives and their mere presence in an IPO may not be a vote of confidence in the company or its long-term prospects.

Via Businessline