I usually dislike doing any cut-off date analysis of returns on IPOs since there is nothing sacrosanct about any one time period, but found myself wondering, as the diyas were being lit this Diwali eve, the fate of the 10 largest IPOs between this festival and last.

I found that nine out of 10 are quoting above their offer prices, and some by astronomical margins (see table below).

The media and several analysts have been flooding us with reports on the deluge of IPOs and the losses to investors arising from the overpricing of new issues. This scare has led to a proposal of rating IPOs - an untried and questionable idea.

For one, there is no deluge. In the one-year period, only 79 IPOs have been floated raising a meagre Rs 12,898 crore (Rs 128.98 billion).

For another, the analysts seem to forget that IPOs do not operate independent of the secondary market, once made, they list on it and are influenced by it.

For me, efficient IPO pricing is determined by whether an IPO gave the investor an opportunity to exit at a profit and if not, was the reason a crash in the secondary market around the time of listing.

On this parameter, I find that almost all IPOs offered a profitable exit window. Of the 124 IPOs floated between April 2003 and April 2006 - the period of the bull run - as many as 85 were still quoting above their offer prices as on 31 May, 15 days after the crash. And the collective loss on the remaining 39 issues, at Rs 1,324 crore (Rs 13.24 billion), was a fraction of the Rs 25,511 crore (Rs 255.11 billion) gain on the 85 winners.

The top 10 IPOs, even after months of listing, have given a positive return. The only exception - Deccan Aviation - is suffering entirely due to the increasing warfare in the airlines industry.

Significantly, all large issues, which also entail larger number of investors, have done well. In this period, 79 IPOs were floated, to collectively raise Rs 12,898 crore (Rs 128.98 billion). The top 10 IPOs accounted for Rs 7,035 crore (Rs 70.35 billion) of the total amount.'

If these have given positive returns, and as they constitute a major portion of the issuances, the bogey of IPO over-pricing should be laid to rest.

The proof of pricing should lie in only two parameters: the level of over-subscription and the listing price. If both are significantly in the positive zone, the accusation of overpricing becomes absurd.

Lessons to be learnt. Like all mid cap and small cap stocks do not do well and like an investor typically does not invest in all secondary market stocks, all mid and small size IPOs would also not do well post-listing. The investor should do value investing in IPOs, and keep three parameters in mind.

The promoter's track record should be outstanding as it is he who is going to manage your money (and not the unnatural entity of company).

Institutional participation should be significant because they validate the issue quality and price.

The size of the issue should be large as that would ensure a large float and liquidity as also opportunities for mutual funds to aggregate.

From the policy perspective, rather than fret over issue pricing, the focus should be on improving disclosures and reduction of malpractice to help investors make informed decisions, checking companies from committing irregularities and monitoring the end-use of issue proceeds. Grading of IPOs is not the solution.

The author is managing director, Prime Database, and can be contacted at prithvihaldia@yahoo.com