The IPO Bandwagon

January 1, 2021. The Nifty ended the day at 14018.50 points while the Sensex closed at 47868.98. Five and a half months later, on June 15, the Sensex closed at an all-time high of 52,773.05. No event, not even the deadly second wave of the Covid pandemic, seemed to interfere with the party on Dalal Street. The bull-run that started in October and picked up pace in the New Year provided just the right window for companies looking to go public. It was time to IPO.

It’s hardly surprising then that since January, nearly a score of companies have hit the bourses and raised around Rs 17,000 crore via investors. And, as the second wave eases, more and more companies are queuing up to the market regulator, the Securities and Exchange Board of India (Sebi), with their listing plans. “We are witnessing high momentum in the Indian capital markets.

A significant amount of activity is driven by huge dry powder awaiting investment and companies exploring a listing in India or overseas. The markets continue to reward companies with robust, scalable and technology-led business models,” says Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS), EY India.

Experts tracking the markets cite two more reasons for the market hitting consistent highs. First, the inflows have significantly gone up. Second, the investor count has reached 7 crore as of June 7, 2021, as per BSE.

“The grey market, which has become highly active, has also contributed to the IPO boom,” says Dhiraj Relli, MD & CEO of HDFC Securities. Investors, whether foreign or domestic, are pumping in money that is adding to the IPO boom. Agrees Lav Chaturvedi, Executive Director & CEO at Reliance Securities: “Investors pouring money into good businesses with reasonable valuations has been a prime reason for the sharp increase in IPOs.”

A senior banker and head (Equity Capital Markets) for a leading bank is convinced that this could be a record year for IPOs. “This probably is going to be a record year for IPOs and it’ll probably surpass whatever has been achieved in the past, both in terms of value as well as volumes,” he says.

Words Of Caution
Taking note of the frenzied investor activity in the market, Reserve Bank of India (RBI) in its latest report cautions about a possible bubble in the stock market. The central bank warns that the price boom seen in some stocks may be more than their fundamental value. Experts are worried about the phenomenal rise in the stock markets in the face of adverse economic indicators such as shrinking gross domestic product or GDP, rising unemployment, reports of job losses, increasing inflation, and what have you.

Increased money supply by way of stimulus and various packages announced by several countries in the west in order to kickstart their economies disrupted by the first and second wave of the Covid pandemic, has increasing liquidity in the market. As a result, RBI notes that the price of risky assets tends to have surged across several countries and touched record highs during 2020-21.



“The widening gap between stretched asset prices relative to prospects for recovery in real economic activity, however, emerged as a global policy concern,” RBI says. It points out that this magnitude of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 “poses the risk of a bubble.”

Reasons For The Boom
Abundant liquidity that was injected into the system by governments in the wake of the pandemic has indeed fuelled the appetite for IPOs not just in India but around the world. As Khetan of EY India points out, in the United States the IPO activity tripled by deal number compared with the first quarter of 2020.

In India too, experts point out, the IPO boom is also the result of the shift in the market share to the organised from the unorganised players because of the pandemic. “The pandemic has resulted in better market share for organised players as a result of which larger companies are winning better market share and becoming more profitable,” says Khetan. Many of the startups which were funded by private equity investors and other investor groups are looking for an exit and several of these businesses have also matured and acquired scale as well. Take, for example, Zomato, the app-based food delivery platform. It has filed its DRHP and intends to raise over Rs 8,000 crore from the market via the IPO route. Then, the global equity markets including India are at an all-time high and are prompting promoters and other investors to raise funds through equity.

Sebi The Facilitator
Market regulator Sebi, too, has played its part in supporting the IPO boom by relaxing norms and regulations. In February 2021, Sebi lowered the minimum public offer through an initial public offering (IPO) by a company with a post issue market capitalisation of more than Rs 1 lakh crore to Rs 10,000 crore plus 5 per cent of the incremental amount beyond Rs 1 lakh crore.

“Seeking to boost the listing of startups, Sebi in March 2021 decided a slew of relaxations to norms, including reducing the holding period for pre-issue capital and allowing discretionary allotment to eligible investors,” says Relli of HDFC Securities. Following the path of digitalisation, the market regulator has taken steps to allow digital payments like UPI to help investors participate in IPOs.

“The introduction of ASBA (Applications Supported by Blocked Amount is a process developed by Sebi for applying for an IPO) UPI with online applications has also helped the market to gain momentum after initial hiccups as the banking system had to adjust its processing time frame,” says Dilip Davda, a senior market expert on IPOs.

Narendra Solanki, Head of Equity Research (Fundamental) at Anand Rathi Shares & Stock Brokers says, “Sebi has also proposed changes to the lock-in periods, streamlining disclosures of group companies, and rationalising the promoter group definition to reduce the minimum lock-in period for selling the stake of promoters and other shareholders after an IPO.”

Deven Choksey, MD, KR Choksey Investment Managers, a well-respected authority on the stock market, says the price discovery should take place on the exchange itself and an evolved regulation should take place for the same. “Let the regulation be evolved for allowing the price discovery on the exchange platform itself and if that mechanism can be built-in, probably we will do away with the grey markets and this will give a more transparent process to the primary markets,” says Choksey.

IPO Trends
It has been observed that retail investors square off their positions in a very short duration after a company is listed on the bourses and after they’ve made sufficient profits. Experts says that most of these retail investors keep on rotating a particular amount in the IPO pipeline and are only there for short-term profits. The amount invested is also a leveraged fund and hence they exit on the listing day, or a week, or a month later. Chaturvedi of Reliance Securities disagrees though: “If valuations remain reasonable post listing and the company continues to offer promising growth visibility, investors do not hesitate to hold for the long term.” But retail investors may generally exit shortly after listing to make quick gains, says Khetan of EY India. “Investors must evaluate the business model, valuation and corporate governance while analysing an IPO. Companies can also proactively manage the quality of investors to target, especially those with a long-term horizon to investment and liaising with the research and analyst community,” he adds. Choksey believes an investor would like to rotate the money as much as he can because he’s on a leveraged fund. “Obviously this is the trend which we are seeing on leveraged funds, when an investor finds momentum, he will trade maximum in the market to service the leverage,” he says.

However, the senior banker quoted above does not see a particular kind of investor behaviour. “We can’t generalize about retail economics in short term or long term, you’ll have all kinds of players where there is a huge number of subscriptions and there you will see a great degree of churn in the first one week,” he says.

Big IPOs Lined Up
Companies like Zomato, GoAir, Nuvoco Vistas, and Devyani International have already filed their Draft Red Herring Prospectus with Sebi. The delivery major is expected to raise Rs 7,500 crore from its issue which includes offloading of InfoEdge’s shares worth Rs 750 crore. The party doesn’t look like halting anytime soon. Media reports have been talking about Paytm’s plan to go public in the coming months. If it does happen, it will be valued at $3 billion which will make it one of the biggest such launches so far in the history of India. The government’s disinvestment plan will also drive LIC to the primary market in the future and it will add around 1 lakh crore to the already skyrocketing market. Hemang Jani, Head Equity Strategist, Broking & Distribution at Motilal Oswal Financial Services says, “Zomato, GoAir, Paytm and MobiKwik which are planning their IPOs are expected to keep the primary market busy.

If they get the go-ahead, then this year could turn out to be historic given the sheer size of their IPO.” Relli of HDFC Securities says India’s Internet companies are likely to drive the gush in IPOs as the market braces for a record supply of maiden issues estimated at Rs 2-3 lakh crore in the current fiscal. Which IPOs should investors be looking at closely than others? Khetan of EY India would favour companies that offer innovative business models may appear more attractive. “Companies with higher standards of governance and better financial positioning are the ones which will find it easier to list for sure,” Khetan says.

Chaturvedi of Reliance Securities feels that FY22E is going to be reasonably big for the IPO market. “We have a number of large ticket IPOs scheduled in next one year. As the government has a massive Rs 1.75 trillion disinvestment target for FY22E, the LIC IPO (having an asset size of nearly Rs 32 trillion as of FY20, almost equivalent to the AUM of the domestic mutual fund industry) will be crucial to achieve the target and it will be a mega IPO in the next one year for sure,” he says.

For now, it appears that 2021-22 may go down as the year that generated a record number of IPOs. The IPO frenzy also points to an increased market participation by small investors as the stock market is apparently the last resort for hedging inflation due to falling rate of interest in traditional saving plans including fixed deposits and others.

ashish.sinha@businessworld.in;
@Ashish_BW; ruchit@businessworld.in