How long to hold an IPO scrip?

It has been observed in many countries that while IPOs generally yield abnormal return in
terms of listing gain, more often than not these stocks under perform over the longerterm.
We examine this aspect for book built IPOs in India।

The proportion of scrip with market price above the allotment price is the highest
on the listing day. Therefore, for those companies where the investor does not have
strong conviction about robust fundamentals, it may be a good strategy to exit on listing
day।

After one calendar year of listing (over 240 trading days), more than 50
percent of the IPO scrip trade below the respective allotment prices. This, prima facie
indicates that initial performance of IPO issuing companies often disappoint investors
leading to de-rating. Therefore, investors need to be cautious about the ability of IPO
companies to deliver the forward looking strategy they project during the run-up to IPO।

Despite strong underperformance of a large number of IPO scrip during ~50
trading days, the index for IPO scrip continue to outperform Nifty for at least 100 days
of listing. After that, for about next 80 trading days it yields similar return as nifty. Therefore,
around 100 trading days after listing could also be an important point where an investor
can exit IPO scrip.

Overall the IPO index continues to outperform nifty even after one calendar year of
listing. Therefore, buy and hold strategy for IPO scrip where the investor is confident of
company fundamentals is likely to yield above index return.