With the government planning to go ahead with the disinvestment process, the initial public offer and follow-on offer market is expected to take off in a huge way.
Companies such as SAIL, ONGC, IOC and Hindustan Copper are waiting to hit the markets. More than hundred companies have filed their draft red herring prospectus with the Securities and Exchange Board of India, the market regulator.
Retail investors, however, need to be careful before they jump onto the IPO bandwagon.
Reason: Eight of the 15 IPOs launched this year are trading 18-60 per cent below their issue price.
Jagannadham Thunguntla, head (equities), SMC Global Research, cautions retail investors to stay away from mid- and small-cap issues.
"These firms have issues like concentrated promoter shareholding etc," he says.
Instead, he suggests them to invest in public sector companies.
According to him, though you may not get immediate returns in a PSU offering, you are guaranteed a quality company. One does not know much about mid- and small-cap companies.
Thus, it is better to stick to PSU company issuances, as they are backed by the government.
If you want to invest in other IPOs, you can get some clues from IPO grading.
For instance, Vaswani Industries, which withdrew its IPO, had a grading of 2/5 from ICRA, indicating below-average fundamentals.
However, IPO grading need not be the only parameter. Galaxy Surfactants is another company which recently withdrew its IPO. But, the issue had been graded 4/5 by Crisil, indicating above-average fundamentals.
"When an IPO is withdrawn, you should look at the reason behind the withdrawal. In a depressed market, like right now, even
a good company may find it difficult to raise funds from the market.