Underpriced IPO: Meaning, Formula, Reasons & Examples

What if you sell out a product for ₹100, but the buyers are willing to pay ₹150 just minutes later? Sounds like a bad deal, doesn’t it? 

However, this can happen in the stock market with an underpriced IPO. When a company goes public, it offers a price for its stock, but if its stock rises quickly after its listing, it means that investors were willing to pay more than the initial price. 

This paradox between IPO price and market price is referred to as IPO underpricing, which has long been a mystery to investors and researchers. But why does it happen, and why would a company knowingly leave money on the table?

What is an Underpriced IPO?

An IPO is underpriced when the shares sold to investors are at a price lower than what the market is willing to pay once trading opens.

Say a company sells shares at ₹300 in the IPO, and the stock opens at ₹450 on listing day. That ₹150 gap is the value that went to the investors who applied, instead of into the company’s own pocket.

From the company’s side, this can hurt a little. They could have priced the issue higher and raised more capital for the same number of shares.

Underpricing is not the same as an IPO simply doing well after listing. A stock can be underpriced on day one of listing and still crash a month later once the excitement settles down. 

Formula: 

The IPO underpricing formula is as follows

Underpricing % = (Closing Price on Listing Day – Issue Price) / Issue Price * 100

Example:

A company prices its IPO at ₹500 a share, and by the end of listing day, the stock closes at ₹650. 

Underpricing % = (650 – 500) / 500 * 100 = 30%

That IPO was underpriced by 30%. 

Reasons for Underpricing IPO

• Information Asymmetry: The company and its merchant bankers know more about the business than the investors being asked to put money in. To close that gap, issuers usually price shares a bit lower than they could, a kind of discount for the risk investors are taking. 
• Fear of Weak Market Debut: Merchant bankers managing the IPO really do not want the issue to flop. A poor listing, where the stock falls below its issue price, makes headlines and affects the banker’s reputation for future deals. So there is a natural way to price it a bit lower than its real worth, just to give it some space for a good listing.
• Future Fundraising: Companies that plan to raise more capital later, through an FPO or a QIP, benefit from a strong debut. A stock that gains on day one earns goodwill with investors, and that goodwill matters a lot when the company comes to ask for more money in the future.
• Retail Investor Sentiments: This matters more in India than people think. IPOs gain a lot of hype from social media, and because of how easy UPI has made applying. When that demand builds fast, the price that was decided weeks earlier can end up looking too low by the time listing day comes. 

Why Does Underpricing Happen Despite Book-Building?

As we know that the companies use one of two main ways to sell the shares:

1. Book Building 
2. Fixed Price Method

Most big IPOs in India today do not use a fixed price anymore. They go through book-building. The company and its bankers set a price band, say ₹300 to ₹320, and investors bid somewhere in that range. Once bidding closes, the final price gets fixed based on where demand was strongest.

You will think this should more or less solve the underpricing problem, since the price is being shaped by real demand instead of a guess made months earlier, and it does help to an extent. 

However, the price band itself gets locked in before bidding even opens, based on valuation work done weeks in advance. If sentiment shifts sharply after that, say a sector suddenly gets in momentum, or the grey market premium picks up in the final days, the book-building process does not always catch up in time. 

So even with a more demand-driven system in place, that gap between the band and the actual mood on listing day is still where a lot of underpricing comes from.

Read Also: Pre-IPO vs IPO Investing: Key Differences

Should Investors Chase Underpriced IPO? 

As an investor, a few things that you should check before applying are as follows; 

• Subscription numbers: A high overall subscription count looks good on the surface, but check where the demand actually came from. Retail and NII portions filling up fast do not mean much on their own.
• QIB demand: Institutional investors do far deeper diligence before bidding, so strong QIB subscription often points to genuine undervaluation rather than just hype.
• Anchor investor names: Big, well-known institutional names in the anchor book can be a reassuring sign, though it is not a guarantee of listing gains by themselves.
• Grey market premium: GMP can be useful as a rough directional indicator, but it is unofficial and unregulated. SEBI does not endorse it, and it is wrong often enough that it should not be anyone’s main basis for applying.
• Company fundamentals: Revenue growth, debt levels, and how the business compares to listed peers matter a lot. Platforms like Pocketful, along with Groww and Zerodha, now make this kind of research far easier than it used to be.

Examples of Underpriced IPO

S. No	Company	Year	IPO Issue Price	Listing Price	Listing Gain
1	Sigachi Industries	2021	₹163	₹575	252.70%
2	Paras Defence & Space Technologies	2021	₹175	₹475	171.40%
3	Latent View Analytics	2021	₹197	₹530	169.00%
4	IRCTC	2019	₹320	₹644	101.20%
5	Bajaj Housing Finance	2024	₹70	₹150	114.30%

Underpricing vs. Overpricing

IRCTC and Sigachi make underpricing look almost like a given, but that is not always how it goes. Take Paytm’s 2021 listing, which was priced at ₹2,150 a share, and the stock opened below that and kept falling through the day. That is the opposite of underpricing, called overpricing, where the issue price turns out to be higher than what the market was ready to pay.

The same market, the same year even, produced a 101% gain for IRCTC and a loss for Paytm investors on day one. 

Company fundamentals, sector mood, and how much hype built up before listing all pull in different directions, and there is no formula that tells you in advance which way it will go.

Read Also: What are the Different Types of IPO in India?

Conclusion

IPO underpricing is an interesting part of the stock market because it can make investors earn a big profit even on the first day of listing. As we have seen from several Indian IPOs, some stocks have listed much higher than their issue price, showing that investors were willing to pay more than the price set by the company.

But a strong listing gain does not always mean that the company is a great investment. The price can be influenced by demand, investor excitement, and market sentiment. So, while an underpriced IPO can look like an easy opportunity to make money, investors should also look at the company’s business, financial performance, and future growth before investing.

In the end, IPO underpricing shows that there is often a big difference between the price a company sets and what the market is willing to pay.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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