Markets
Tempted by the IPO boom? Sebi and these experts would like a word.
Summary
- A recent Sebi study revealed that more than half of IPO shares by value, excluding those allotted to anchor investors, were sold within a week of listing.
- With the IPO market booming again, merchant bankers, investment managers and retail investors must all act more responsibly, experts told Mint.
Most retail investors put money in initial public offerings on impulse, which suggests they lack complete information about these public issues, experts told Mint. With the IPO market booming again this year, there is a need for merchant bankers and investment managers to act more responsibly, but also for individual investors to be more informed about what they invest in, they said.
On 2 September the Securities and Exchange Board of India (Sebi) released a study that revealed most retail investors use IPOs for short-term bets rather than long-term investments based on fundamentals. It found that about 54% of IPO shares by value, excluding those allotted to anchor investors, were sold within a week of listing.
Anand K Rathi, co-founder of wealth management company MIRA Money said, “Instead of investing for the long term, many retail investors are looking for short-term gains before moving on to the next IPO."
Pritha Jha, partner at Pioneer Legal, said stocks sometimes surge upon listing, but naturally course-correct once the rush of trading post-listing stops. “What this unfortunately means is that even long-term investors put money in IPOs without knowing why, and whether they will benefit in the long term," the lawyer said.
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Before releasing the study, Sebi had issued an advisory that raised concerns about dubious practices in the small and medium enterprise (SME) market, where promoters paint an unrealistic picture of their business, announce bonus shares and stock splits to boost sentiment, and sell their stakes at inflated prices. Since its inception in 2012, the SME platform on stock exchanges has seen significant growth, raising over ₹14,000 crore in the last decade.
Making hay while the sun shines
Tejas Khoday, founder of the web trading platform Fyers, said India saw 272 IPOs in FY24 alone, 80% of which involved SMEs. Of the 20 IPOs so far this year, many were oversubscribed hundreds of times, he said. Cybersecurity startup TAC Infosec’s ₹30-crore IPO was oversubscribed 422 times and men’s grooming brand Menhood garnered bids for 200 times the shares it put on offer.
Also read | SME IPO frenzy: The red flags that investors shouldn't ignore
New-age startups have joined the party, too. Mint reported on Tuesday that after a lull in 2023 and 2022, 10 new-age companies have made their stock market debuts so far in 2024, including prominent players like Go Digit, Awfis, ixigo, FirstCry and Ola Electric.
The IPO of e-commerce SaaS (software as a service) platform Unicommerce was oversubscribed a whopping 168 times, while that of co-working space provider Awfis saw oversubscription of more than 100 times. Evena mega issue like Ola Electric, which raised ₹6,145 crore, was oversubscribed 4.4 times.
Also read: WeWork, Simpliwork, Table Space firm up IPO plans on investor interest in coworking companies
However, experts pointed out that the surge in IPOs, typical of bull markets, may be a sign that poorly managed companies are taking advantage of the exuberance to go public. High levels of oversubscription are fueling greed among unlisted SMEs, who are eager to go public, experts said, adding that lower disclosure requirements and weak governance structures for SME IPOs were also to be blamed.
In the past five years, the BSE SME IPO index has delivered an astonishing 6,000% return. The BSE IPO index has returned 230%, the midcap index around 250%, and the Nifty50 about 125% over the same period.
Just say no: Sebi
Concerned about this surge in IPOs, Ashwani Bhatia, a whole-time member of Sebi, urged merchant bankers, chartered accountants and stock exchanges to ‘say no’ to public listings during an event on 29 August. Echoing this sentiment, Pritha Jha of pioneer legal said in the current market environment, few are scrutinising whether a company should list in the first place.
Khoday emphasised the importance of responsible investment banking, advocating for higher entry barriers. Sebi’s consultation paper of 28 August, which proposed stricter regulations for merchant bankers, aims to raise these barriers and ensure accountability. "India needs more savvy merchant bankers so that worthy companies can raise capital through IPOs," Khoday added.
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Jha also underscored the need for greater responsibility among merchant bankers and wealth management firms, as they often have access to more information about companies than is disclosed in the IPO prospectus. They have a duty to share their insights with investors, she said. "Sebi is urging caution from advisors because if the companies in which people are investing fail to perform, public money will be lost and people will start questioning why Sebi didn’t intervene earlier," she added.
IPO investment checklist
While Sebi has issued warnings to market institutions, that investors also take it upon themselves to be more informed when investing in IPOs, experts said. Sarvjeet Singh Virk, co-founder & managing director of Shoonya by Finvasia, advised investors to do the following before investing in an IPO:
- Evaluate the company's underlying fundamentals, business prospects, order book, and valuations.
- Assess the industry to understand the business' market potential.
- Review the draft red herring prospectus (DRHP) or red herring prospectus (RHP) to understand the purpose of the IPO and the company’s plans.
- Check the company’s shareholding pattern.
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