THE IPO BOOM

 

THE surge of Initial Public Offerings (IPOs) continues in the Indian stock markets, reflecting the strong fundamentals of equities and robust investor belief in the country’s economic growth. As 2024 draws to a close, the fundraising through IPOs has touched a new landmark helping companies raise a record Rs 1.6 lakh crore. The number is set to swell further in the new year as many proposals for IPO are in the pipeline. The IPO phenomenon has added a spicy touch to the investment story as more and more retailers are mounting the bandwagon on the promise of higher returns through the markets.

 

It is a happy development on the economic front but with too many riders, especially in the IPO boom which can go awry on the slightest of bad sentiment in the markets. The key factors behind many companies coming out with initial public offering of its shares include rising retail participation, strong domestic interest, rise in private capital expenditure and boost to some sunshine sectors by the Government. The last factor has helped many ancillary companies of the main products enter the market for listing and raising good funds on the back of the rising interest in stock markets. Some IPOs, both in the mainboard and SME segments, have provided handsome returns in a short period to investors. It has created a positive atmosphere among the retailers who are not afraid of parking their funds in the equity market. And it has also led to a situation where investors are inclined to earn some quick bucks through listing gains. A data-driven study of the behaviour of IPO investors in the last couple of years has shown that over 50 per cent people sell their allotted shares in the very first week. The SME segment has become a darling for investors due to the massive listing gains many stocks have provided.

 

In some cases, investors walked away with gains of over 100 per cent in a single day which later forced the regulators to cap the issue price for listing. Despite the short-term capital gains tax of 20%, investors are not bothered to book listing gains which sometimes exceed over 50 per cent within minutes of listing. All this presents a rosy picture to the retailers some of whom are ready to put their continency funds for short-term gains. But there is a hidden danger in the entire situation as the basic need to study the fundamentals and valuation of an offering company is fast getting compromised. The dangers are more prominent in the SME segment where start-ups and lesser known companies are filing applications for an IPO. A few cases have seen exchanges stopping some issues after red flags were raised about the companies’ valuations. Detailed probe found that high valuations were presented in the Draft Red Herring Prospectus to the Securities and Exchange Board of India (SEBI).

 

In some cases, there was a clear attempt of window-dressing to attract investors while some cases had a deeper problem of suspect ownership patterns as well as conflict of interest. Though these were just a few examples of wrong information provided by the aspirant companies, those were signals of desperation by smaller companies to join the fund-raising race in the boom period. Data shows that a large number of companies are listed in a year but almost half of those cannot sustain the competition despite raising good funds through IPO. The negative revenue results in eroding investor wealth and retailers are the worst-hit as they fail to find an exit route. The sheer volume of capital raised through IPOs also flags the tendency of investors going overboard. The regulators must make them aware of the perils of chasing too much in a short time, for, if things start going wrong due to uncontrollable factors, investor appetite can also vanish in a flash.