Naive investors are chided to bid for IPOs. Investors are using them to pass on bad investments, legally

India's obsession with the stock market has never been higher. In the last 10 years, more than 160 million demat accounts have been opened, an 8 time increase from 2014. Thanks to free access of investment knowledge on social media, word of mouth and a relatively easy access to the market through fintech platforms, many first time investors are choosing to invest in equities.

Though this development is encouraging, many are influenced by the Fear Of Missing Out (FOMO) mentality, hoping that their investments could help them get rich quickly.

For many, this meant investing in risky Futures and Options, which, thankfully, the SEBI has restricted due to unusually high losses witnessed by most inexperienced investors. Although those doors are more or less closed, many of the ‘finfluencers’ are encouraging people to invest in order to get rich quickly, often with their hidden agendas. 

Most don’t have the patience or time to research the right stocks to invest in, and these so-called finance influencers have been portraying themselves as experts in their domain, offering questionable ‘free’ advice. With inflation rising and employment opportunities few and far between, many naive investors believe them, with the hope of getting rich quickly.

In such cases, these finfluencers with questionable credentials have been encouraging people to invest in Initial Public Offerings (IPOs). Most IPOs are timed when investor confidence in the market is at an all time high- during the bull run. 2008 had 108 IPOs, 2010 had 66 during the last bull run. Nobody knows how long this current bull run will last, but these overzealous social media influencers are encouraging investments as an opportunity that won’t come again. 

Most of them show examples of oversubscribed IPOs, where those who applied get handsome returns, even with modest investments. Quadrant Future Tek Limited’s IPO in January is one such example. Its retail section was oversubscribed 256 times, with shares rising 53% on listing. Broking analysts recommended investors hold the stock, considering its strong research-based fundamentals. These finfluencers highlight the analyst recommendations, but won’t bother to caution investors about the risks associated with their investments. What they will also not say is that this IPO was the best performing this year, and no other IPO came close to the returns received here. These influencers continue their recommendations, and people continue to trust them. 

For many unscrupulous investors,investing in the IPO resembles buying a lottery ticket. Applying for one is now relatively easy with just a few steps on an app. Shares allotted are quickly sold at the first sniff of profits, mostly expected after listing, though not always. 

The companies know this, the investors know this, and most of them look at this tendency as an opportunity to cash in on their investments to unsuspecting first-timers. Enterprise investors may not believe in the company’s growth trajectory, but they know they can profit from it when the company goes public. This misuse of the IPO has been going on for quite some time now, yet no one is complaining enough, as everything is legal, though maybe not ethical.

After their IPO in June this year, ArisInfra solutions, a B2B construction materials marketplace platform, saw its shares lose more than 21.58% of their value after listing. As soon as the stock was listed, existing investors including Citigroup Global Markets Mauritius and Nova Global Opportunities Fund PCC sold more than 10 lakh shares in the company, even though the shares rose just 5% immediately after listing. Those who bought the shares are now figuring out what to do, as their expectations haven’t been met, and they are forced to hold shares whose values may never rise.

In all of this, the company gains its reputation and a better standing higher valuations, the investors get an opportunity to exit the company with their profit, the company’s present and future performance notwithstanding. The only loser? The retail investor who may hope for the prices to rise, maybe forever.