Have you ever thought about why some IPOs start off strong but later fall below their issue price? It happens a lot, and there are some simple reasons for it. It’s usually a mix of high pricing, market changes, and how investors react after the first-day excitement. Let me explain.
First, overvaluation is a major factor. Investment banks often price IPOs aggressively, relying on future growth projections rather than current fundamentals. This means the stock price might not reflect the actual value of the company. Plus, companies sometimes inflate their valuations to give early investors, like venture capital firms, a profitable exit. The result? Once the initial hype wears off, the stock struggles to sustain those high prices.
Regulatory constraints can also play a role. SEBI mandates that all listed companies, regardless of their market capitalization, must ensure a minimum public shareholding of 25%. This means promoters cannot hold more than 75% of the shares. This rule applies uniformly to all companies and is aimed at improving market depth and reducing the concentration of shares. When promoters offload shares to comply with this rule, it can create selling pressure, which might contribute to a decline in stock prices.
Market dynamics add to the problem. High subscription rates during the IPO create buzz, but once the stock starts regular trading, reality sets in. Investors reassess the fundamentals, and the initial excitement fades. If the broader market faces a correction, newly listed stocks are hit harder since they’re often still finding their footing.
Take BLS E-Services, for example. It listed at ₹305, which was a 125.93% premium over its issue price. Sounds amazing, right? But the excitement didn’t last forever—it’s now trading at around ₹204.74, which means it’s down by about 32.6% from its listing price. So, while the initial buzz was great, the stock hasn’t managed to hold onto all those gains.
Now, let’s talk about Bajaj Housing Finance. It had an issue price of ₹70 and was listed at ₹150, giving investors a 114.29% premium. And here’s the interesting part—it didn’t drop right after listing. In fact, it hit the upper circuit at ₹164.99 and held strong, proving that not all IPOs lose steam after the first-day frenzy.
Investor behaviour also has a big impact. A recent SEBI study showed that 54% of IPO shares are sold within a week of listing. Non-institutional investors sell 63.3% of their shares within this time, while retail investors sell 42.7%. This short-term profit booking adds selling pressure, making it hard for the stock to hold its gains.
Now, this doesn’t mean all IPOs are bad bets for the long term. In fact, some companies with poor listing gains eventually perform well. For example, Aadhar Housing Finance, EPACK Durable, and Ola Electric Mobility delivered strong returns later. Out of 53 IPOs with weak listings, 36 managed to generate positive returns over time.
As an investor, there are ways to avoid getting caught in this cycle. Don’t get swayed by the hype or high subscription numbers. Focus on fundamentals like the company’s financial health, growth potential, and competitive position. Look at the industry’s outlook - some sectors, like green energy or tech, may offer better opportunities for long-term growth. And if you decide to invest in an IPO, consider holding it beyond the listing day instead of aiming solely for quick gains.