Monday, October 25, 2010

Technical Analysis of IPO?

Technical Analysis is done based on the price-volume behaviour of listed shares. Before an IPO, the shares are not traded in the market. Therefore, one cannot do technical analysis of shares, pre-IPO.

However, during the Coal India IPO, a different kind of technical analysis seemed to be at work - analysis of allotment possibilites. Accordingly, investors invested a multiple of the shares they wanted. The excess application maximises the number of shares that would be allotted to them, under the partial allotment formula in an over-subscribed issue.

Recently, institutions were permitted to invest through ASBA (Application Supported by Blocked Amount). Under ASBA, the money goes out of the investor's bank account only on allotment. The amount that goes out is limited to the value of the shares allotted. This has made the task of putting in excess applications, simpler.

Old timers in the market may recall that about two decades ago, investors had the facility of investing through StockInvest, which was to be backed by money in the bank account of the investor. The facility fell through, after a few banks started issuing StockInvest without the value being backed by money in the bank account of the investor. Let us hope that banks do not adopt the same mal-practice under ASBA.

A few months ago, SEBI stipulated that Foreign institutional investors need to bring in the entire share application money at the time of investment. This, coupled with the excess application scenario, means that the FII inflows (and potential outflows of excess money post-allotment) increase the challenge for RBI in ensuring stability in the foreign currency market. A good example of the law of unintended consequences!

Coal India IPO is a good example of areas for regulaters to watch out for.

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