A Note on IPO Exit Strategy

As per an EY report, India has emerged as the global leader in the number of Initial Public Offerings (IPOs) year-to-date in the current fiscal year. 

The third quarter of 2023 witnessed at least 21 IPOs in the Indian main market, compared to a mere four in the same quarter of the previous year. The proceeds raised during the third quarter (Q3) 2023 registered was US$ 1,770 million, a substantial surge of 376% compared to US$ 372 million in Q3 2022.

Having said that, all retail investors investing in IPOs must also have their exit plan. It is important to note that not all the IPOs that give significant gains on the listing day manage to hold on to those gains in the short and medium run. An exit plan becomes essential for those retail investors who remain stuck with massive listing losses. 

Here’s a list of the few exit plan strategies for an investor to consider, which include:

Flipping: A retail investor typically bids for an IPO after the issue opens. Generally, most IPOs have a time frame of 3-4 days during which investors can apply. After this window closes, the process of IPO allotment begins, and an individual may be allotted shares. This is then followed by the listing date, which is the time when a company’s shares are listed on stock exchanges. 

Typically, stock prices will likely experience rapid change—either skyrocketing or plummeting—on the listing date. In case a retail investor anticipates the stock price to shoot up on the listing day, they can cash in on the listing gains by using the IPO exit strategy referred to as flipping. 

Flipping is the process of acquiring shares in an IPO and initiating an immediate selling on the listing date, the first day the shares are publicly traded. In case the stock prices surge substantially, an investor stands to gain a fair share of profits.  

However, market regulators and experts suggest against adopting the flipping strategy as in case a significant number of investors practice flipping, it could lead to the share price pulling down. 

Long-term investing: In case a retail investor anticipates that the shares in an upcoming new IPO will perform well in the next few years, it may be a better idea to hold it in the portfolio for a couple of years rather than flip it on the listing date. 

This is a long-term exit strategy that an investor may also know as the buy-and-hold strategy. It is suitable in the case of shares that are fundamentally strong and, as a result, are undervalued. 

It is important to note that in case an investor adopts a long-term investing strategy, the holdings will experience several market cycles. The prices of the shares are likely to witness a cycle of dip, rise, and dip again as the market goes through bullish or bearish sentiments. 

However, the prices will stabilise for fundamentally strong companies in the long run. In case the shares were undervalued originally, they are likely to experience correction and will reflect the true value of the asset, resulting in significant gains when an investor exits their position. 

In case an investor decides to adopt this exit strategy, they will have to account for Long-Term Capital Gains (LTCGs) and the relevant taxes thereon, though.

Sell and reinvest: In case a retail investor invests in an upcoming IPO, the stock prices likely plummet initially on the listing date. This may lead to a loss during the listing. A few investors may opt to bear this loss and sell their holdings and then reinvest in the company in the secondary market at a relatively lower price. 

This strategy is useful in case an investor wishes to offer some of the capital gains with losses and bring down the tax liability. This technique is also referred to as tax loss harvesting. 

However, before following this strategy, it is important to ensure that the portfolio can withstand the losses that are likely to be faced.