IPOs : Investors’ Pain & Opportunities

In 2021, we cheered the ‘coming of age’ of Indian capital markets, and the energetic way in which startups embraced public investment markets. Or more specifically the unsaid passing on of enterprise-risks to retail investors. 

Sixty three companies launched their IPOs in CY 2021, and investments of more than Rs 1.18 lakh crore were picked up. The capital market also made history in terms of total fund-raising quantum, the size of IPOs, subscription and debut premium (and debut discount in few cases). For the upcoming CY 2022, the Indian IPO story is expected to be bullish. 35 companies already have SEBI approval to raise to the tune of Rs 50,000 crore. 33 companies are waiting for the regulatory nod to raise nearly Rs 60,000 crore. And to top it up, the mother of all IPOs, that of LIC, is expected to be launched anytime soon. This could mean that CY 2021 might set a new record, with IPOs mopping over Rs 1.6 lakh crore of public monies. 

The year that went by, also saw many listed entities actually using a portion of the IPO proceeds to invest into other (unlisted) companies as a growth-strategy. That would have been par for the course, if only they had been ‘financial investment entities’ and not operating companies with a stated business purpose ! Many of the so-called investors, who brought velocity in the IPO run-up, quietly booked their profits and exited in a month, when the lock-in period for ‘anchor investors’ ended. In short, many of such listings reminded one of ‘musical chair’ and the ‘investment risk

Many intelligent investment experts criticise the retail investors for not reading 300-odd pages of any DRHP and blame those individuals for their missing out the small print risk-factors listed in some obscure page. Tut tut, the retail investors are to be blamed?

Probably SEBI would take leaf of how the GoI pushed a regulation for cigarette packets to have large photos, ghastly at that, to bring shock value to cigarette buyers - that was about ‘highlighting the risks upfront’. Say a new rule that expects the companies in the IPO queue to have risk factors to be listed in bigger fonts in all their communication material,  including the ads. After all, ain’t it the role of the Board of Directors to ask the management to list risk factors, it’s mitigants, and the company’s preparedness towards them ?

Latest from the regulator

Yesterday, the securities regulator SEBI brought in positive moves to tighten the loose ends in the market. Rightly, the regulator has stayed away from anything that would influence or decide the pricing of IPOs and have left it to the market wisdom.

With experience of recent large listings, and subsequent volatility, they have brought in these updates :

• Instead of current rule of staying-invested for a month, anchor investors will now have to hold half their holdings for at least 90 days
• To improve disclosure norms, companies can allocate only 25% of an issue’s proceeds for acquisitions where a target has not been identified. The total allocation for unidentified acquisition and ‘general corporate purpose’ cannot exceed 35%. 
• IPO-companies henceforth have to appoint a credit rating agency to monitor and report on the end-use of funds.
• Retail investors category is being split into two categories. One-third of the issue will have to be reserved for those who invest between Rs 2 lakh and Rs 10 lakh; the remaining two-thirds will be for those who invest Rs 10 lakh and above in the issue. This move is expected to prevent the smaller investors losing out the investable opportunity.

Will these rules safeguard retail investors ?  Are there any other rules that can be proactively thought-about for investor protection ? Are there any other aspects of policies that can help develop the capital markets ?  Is there something more for better and more ?

Srinath Sridharan - Corporate Advisor & Independent markets commentator 

Twitter : @ssmumbai