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India's first penny stock IPO opens

Roshan Parwatay

India's first penny stock initial public offer (IPO), Computer Power (India) Limited, which opened on May 8, 2000 and is priced at Re 1, is bound to create a sensation. Investors' reactions have been diverse — ranging from hope to caution. Some are tickled and want to invest right away. The logic: hardly anything to lose at one buck! Others can't believe their eyes as they see the offer document and wonder if it's a printing error.

The company's promoters are Easwar Subramanian, Easwar Ramabhadran, and J Venkataraman (see IPO Analysis). The Madras-based firm is in the business of software development and training, and has been funded by Federal Bank.

Penny stocks are quite common in the US with many funds and Websites exclusively dedicated to them. For India, however, this is the first penny stock IPO after the Securities and Exchange Board of India abolished the par value concept. Earlier, companies issued shares at a face value of Rs 10. HCL Technologies issued shares with face value of Rs 4, but it carried a huge premium. Computer Power is a true blue penny stock being issued at Re 1 and there is no premium. Of course, the secondary market has enough stocks trading at Re 1 or below.

What is a penny stock?

There is no clear definition for a penny stock. In the US, any stock that trades between $1 to $5 or trades in pink sheets (National Quotation Bureau's service, commonly referred to as the "pink sheets") on the NASDAQ is called a penny stock. A true US penny stock will have less than $ 4 million in net tangible assets and will not have a significant operating history.

This means that if the company has real assets, such as equipment and inventory, and is engaged in some 'real business', such as manufacturing, it is not a penny stock, even if its shares trade below $5. Going by this definition, most of the recent public issues of software companies, which have no credible track record of profits, are penny stocks.

Abroad, penny stocks are generally traded on OTC exchanges and not on the main stock exchange. Price information is generally not freely available and small investors have to rely on brokers for information.

The bad penny

lliquid, prone to rumours and often peddled by unscrupulous promoters and collusive brokers, penny stocks are subject to manipulation. The most common trick will look very familiar in India: a broker gets hold of a huge amount of the penny stock at low prices and, then through high-pressure sales techniques, stirs up demand and the price. The price continues to rise until there are no more investors who will buy. Then the bottom falls out and the price plummets. Until a few years ago this was a familiar game for brokers in Jaipur, Rajkot and Ahmedabad.

Legitimate penny stocks

Of course, all penny stocks are not bad pennies. Some of them are legitimate companies whose securities trade in the pink sheets at very low prices. Struggling young companies just starting out are perfect examples. Investment in such a company, held through the company's formative years, can pay off well. Such an astute investment requires three things: the ability to choose the right company, the capital to invest and hold the investment, and luck.

In order to choose the right company, you must know something about the feasibility of the company's business plan, its management, its capitalisation and cash flow.

The penny advantage

The beauty of the penny stocks is that they are cheap and sometimes they grow and become 'mid-cap' stocks, multiplying in value almost 100 times over. With penny stocks, you see much greater price volatility, and thus greater and quicker gains and losses in asset values. It is precisely this volatility which draws investors, as one good pick could make you hundreds of times of what you could ever make on the larger stocks. That little one-rupee stock, thus, might just be your ticket to becoming a millionaire.

By Kensource Information Services Pvt Ltd

IPO Center

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