Underpricing in Fixed-Price IPOs: An Empirical Analysis of the Indian Market

Abstract

Initial Public Offerings (IPOs) serve as a critical mechanism for companies to raise capital and transition to public ownership. However, one of the most persistent and widely studied phenomena in IPO pricing is underpricing, where the offer price is deliberately set below market value, leading to substantial first-day listing gains. This study investigates the extent, determinants, and implications of underpricing in fixed-price IPOs in the Indian market. Using a dataset of 123 IPOs listed on the National Stock Exchange (NSE) between 2015 and 2020, the research analyzes key factors influencing underpricing, including investor sentiment, firm characteristics, industry sector trends, and market conditions. The findings reveal that subscription rate is the strongest predictor of first-day returns, with highly oversubscribed IPOs experiencing significant listing gains. Additionally, IPOs launched in bullish markets and within high-growth sectors, such as technology and consumer goods, exhibit greater underpricing than those in financial services and manufacturing. However, while underpricing generates immediate gains, its long-term impact is often negative, as excessively underpriced IPOs tend to underperform over extended periods, suggesting overvaluation risks. This study provides valuable insights for investors, issuers, and regulators, emphasizing the need for balanced IPO pricing strategies. The research also highlights the role of SEBI’s regulatory framework in mitigating extreme underpricing while ensuring efficient price discovery in the Indian capital market.