There may be numerous reasons for companies to issue IPO and raise additional funds. A few of them are expanding the business, aiming for growth, reducing debt, paying off shareholders, mergers and acquisitions and so on. When investors lend their money to these companies in the name of an Initial Public Offering, what do they expect in return? There the concept of listing gains comes into the picture.
In this blog, we’ll cover the concept of listing gains in an IPO in detail. So, let’s dive in.
What do you mean by listing gains in an Initial Offering?
It is common for investors to expect profits on their investments in the companies. As the name suggests, listing gains refer to the gains enjoyed by the investors as soon as the shares of the business are listed on the stock market, i.e. the secondary market where trading of securities takes place.
When listing securities in the stock market happens, share prices might rise because of the high demand, further leading to profits for the investors. This rise in the share price is expressed in terms of percentages.
However, it is not uncommon for investors to face the opposite situation, i.e. lose money on the days of listing due to less demand.
How to calculate it?
The calculation of revenues is simple. Let’s have a look at an example to understand it better.
Ms. Kiya loves investing. She’s been investing in stocks, mutual funds etc. for a long time. But recently, she came across investing in an IPO. She’s intrigued when she learns that there is one more way to earn through investing other than dividends. Hence, she decides to give it a shot.
Kiya applies to the offering of the X ltd. The minimum limit of shares to be subscribed by the investors is 20, meaning that one lot has 20 shares. She places a bid for Rs 200 a share. She plans to subscribe for 5 lots. Her total investment was Rs 20,000.
Now, due to high demand, the prices of the shares on the listing date rise to Rs 300 per share. Looking at the prices going up, Kiya decides to sell off her investment worth Rs 30,000.
Hence, Kiya’s listing gains would be:
= Rs 30,000 - Rs 20,000
= Rs 10,000
Is there any relationship between oversubscription and post-list share prices?
When oversubscription of IPO happens, not every bidder gets the same amount of shares they subscribed to. Since demand is more than supply, the bidders are not allotted fully.
However, there is no exact relationship between oversubscription and post-list price. A considerable amount of oversubscription does not guarantee a good post-list performance of shares.
Oversubscription can be one of the reasons for the excellent post-listing performance of shares, but other factors also play a major role. These are market conditions, demand and supply, powerful sectoral play, various global factors, etc. We will discuss a few of these factors in a later section.
Example: If you compare Dixon Tech with MAS financial, you can see that Dixon Tech was 117 times oversubscribed while MAS financial was 128 times oversubscribed. The returns of Dixon Tech were 83%, while Mas financial witnessed returns of only 26% post listing.
How is the post-list price determined
Demand and supply
As we mentioned earlier, demand and supply do play an important role. If the demand for the company’s offering is higher than the supply, the price after the listing of shares will be more than the offer rates, making it profitable for investors.
But investors make losses too. It usually happens when the supply of shares exceeds the demand by the potential subscribers. In such a case, after listing, prices get lowered than the offer prices.
Growth potential
Most companies choose to shift to a public company to grow and expand their business operations. Now, if the company’s growth potential is very high, more retail investors will be interested in investing in the company, causing the demand to rise. Hence, more demand can lead to better list prices.
Grey Market Premium
It refers to the willingness of investors/subscribers to pay additional funds towards the shares in the IPO. Let’s say the offer price is Rs 800 and the Grey Market Premium GMP is Rs 100, it is most likely that the offer will get listed for Rs 900. But this doesn’t guarantee excellent performance of IPO post listing. The reason can be the increased demand.
Market conditions
We all know that retail investors’ interest in an offering plays an important role in deciding the demand and the post-listing performance. If the interest of investors is high and the market conditions are positive, it is a positive indication. However, things can take a U-turn if the interest is not up to the mark.
How are these gains taxed under the Income Tax Act?
The two types of gains are short-term and long-term. Since the ones we are talking about take place in a very short period, hence they fall under the category of “short-term gains”.
Usually, investors have to pay STT (Securities Transaction Tax) charges while selling their investments listed on the stock exchanges. Supposing that investors have already paid these, the gains will be taxed at a 15% rate.
Conclusion
Listing gains is one of the ways for investors to earn profits during very short periods. However, you should not subscribe to each IPO you come across, as not every overly subscribed offer leads to outstanding after-performance. If you evaluate a few factors, such as the ones mentioned above, you’ll be able to make good returns on your investments. Hence, you must always pay attention to the company’s long-term growth potential, background, market conditions, etc.
Frequently Asked Questions (FAQs)
Q. What are STT charges?
Securities Transaction Tax is the tax that investors are bound to pay if they sell their investments that are listed on the stock exchanges.
Q. What factors affect IPO performance?
The factors affecting the same are market sentiments, the company’s growth prospects, the interest of the retail investors and others.
Q. Is it good to sell the shares on the listing day?
Mostly the prices on a listing day are higher than those later in the year. Hence, it is up to you whether you wish to sell your securities.
Q. Do IPOs always generate profits?
The answer can be both yes and no. Yes, usually, all IPOs generate profits to some extent. No, if you choose to invest before researching the company, its background, future potential and prevailing market conditions.