Underpricing in Privatized Public Offerings: The Indian Experience

Abstract

Underpricing of IPOs is the sale of shares at low prices and it is a well-documented fact of empirical equity market research. Present study aims to examine the same by estimating the magnitude of underpricing in disinvestment oriented IPOs and FPOs. Along with this, it also aims to compare the degree of underpricing across IPOs and subsequent stages of FPOs. Total number of IPO and FPO cases to be analyzed are 46 (8 IPO, 25 FPO-I, 10 FPO-II, 3 FPO-III) which have been introduced during 2003-2017 by Govt-owned enterprises in India. Market adjusted excess return methodology has been used to compute underpricing. Results depict that underpricing do exists in privatized public offerings. The study also witness the reduced underpricing levels from IPO to third stage of FPO which indicate towards high cost of raising equity at IPO and gets reduced at subsequent stages of FPOs. Based on the findings, the research recommends that divestment activity should spread over different stages of offerings i.e. IPOs and FPOs. This research contributes to the literature by estimating and comparing the magnitude of underpricing in “privatized” public offerings and provides the Governmental institutions and investors with the base and information to make appropriate decisions.