IPOs Flipping: A Short-term Trade
Individual investors sell 67.6 per cent shares by value allotted to them within a week, when returns are more than 20 per cent
The market regulator, Securities and Exchange Board of India (Sebi) published its recent study pertaining to the behavioural changes in the initial public offering (IPO) trends. One of the most highlighted insights suggested that about 54 per cent of the shares (in value terms) allotted to investors were sold within a week from listing.
“Individual Investors sold 50.2 per cent shares (in value terms) allotted to them within a week from listing. Non Institutional Investors (NIIs) sold 63.3 per cent shares by value, whereas retail investors sold 42.7 per cent shares by value,” stated the Sebi report.
It further highlighted, Mutual Funds tend to invest for a longer period in IPO shares, whereas Banks tend to sell swiftly. Mutual Funds sold about 3.3 per cent of allotted value within a week, as compared to 79.8 per cent for Banks.
“The surge in IPO exits across all categories, including big-ticket players, indicates a pervasive short-term focus among investors. This trend is fuelled by overvaluation, a lack of confidence in the long-term growth prospects of IPOs, and a desire to lock in quick profits from larger listings,” said Tarun Singh, Founder and MD, Highbrow Securities.
Further, global cues suggest an impending correction due to economic pressures, prompting investors to exit IPOs in anticipation of a market downturn, thereby exacerbating the short-term focus, he added.
Oversubscription And Listing Gains
The Sebi study also highlighted an interesting fact that the investors, in general, show ‘disposition effect’, implying greater propensity to exit from the IPOs that exhibit positive listing gain than those that exhibit loss on listing.
“Individual investors sold 67.6 per cent shares by value allotted to them within a week, when returns were more than 20 per cent and sold 23.3 per cent shares by value, when returns were negative,” stated the Sebi study.
“This behaviour can dampen the long-term performance of IPOs post-listing, as rapid sell-offs create downward pressure on the stock price. As a result, many investors view IPOs as short-term trading opportunities rather than long-term investments,” said Sonam Srivastava, Founder and Fund Manager, Wright Research.
During the period under the study, out of 144 issues as many as 92 issues were oversubscribed by more than 10 times. Study revealed a positive association was observed between IPO subscription, listing day returns, and exit of investors. Higher subscription was associated with higher listing day returns and in turn higher exit by investors.
“Historically, oversubscription often correlates with higher listing gains, driven by demand outstripping supply. However, this isn’t always a guarantee, as post-listing performance depends on broader market conditions, company fundamentals, and investor sentiment. Highly oversubscribed IPOs can also face sharp corrections once trading normalises,” said Narinder Wadhwa, MD and CEO, SKI Capital.
Demats and IPOs
With regards to the accounts opened, Sebi study observed that almost half of the total allotted demat accounts for IPOs during April 2021 to December 2023, were opened in the post-COVID period. Furthermore, 85 percent of the total allotted demat accounts were opened in the last eight years (from 2016-2023).
In the latest data, the registered demat accounts in India with holdings crossed the 17 crore mark, according to data from the National Securities Depository (NSDL) and Central Depository Services (CDSL).
As of 31 August 2024, the total number of demat accounts now stands at 17.10 crore. In August, the stock market experienced heightened volatility, yet around 42.3 lakh new demat accounts were registered. This surge brought the overall total to 17.10 crore by the end of the month.
A recent report of the National Stock Exchange (NSE) stated that out of the 9.7 crore registered investors, only 1.5 crore are active. However, the report highlighted that active investors on the NSE surged by 13.9 per cent month-on-month, reaching 1.5 crore in June.
Retail Approach To IPOs
Since it was apparently highlighted in the study that IPOs are no longer a long-term investment, and the prevalence of IPO flipping is a common practice in almost all the categories, retail investors can leverage the investors' behaviour and safeguard their interests.
“The study can help retail investors craft a more informed IPO strategy by understanding the exit patterns and the impact of oversubscription on listing gains. For instance, the Sebi policy changes post-2022 have resulted in fewer oversubscriptions in the NII category, which could lead to a more balanced demand-supply situation. Retail investors might also reconsider the timing of their exits based on post-listing performance data,” said Srivastava.
