The present IPO fever in India is reflected in the startlingly high number of bids received for the capital that a firm want to raise by going public with an IPO. According to data, 59 initial public offerings (IPOs) have raised a total of Rs. 1,63,862 crore in 2024 thus far, with the typical IPO being subscribed for several times over. Additionally, India had the most initial public offerings (IPOs) worldwide during this period (27% by volume).
So, what is the reason for IPO offers exceeding 17,000 crore for a firm seeking to raise 160 crore? Or why do offers of around 1,100 crore breeze up being accepted for a business that wants to raise only 38 crore? Do these businesses have a distinctive business plan that will likely generate significant profits in the years to come?
The vast majority of these businesses operate in industries with proven business models. Additionally, the majority of these businesses work in highly competitive industries with virtually no potential of making very large profits. This is demonstrated by the lower valuation of similar firms that are already listed on stock markets.
This leads us back to our original question “Why is there such a great demand for these IPOs?”
If you speak with anyone who sells shares, from stock brokers to merchant bankers, or who handles other people’s money, you will hear from them that India’s growth narrative is still going strong. This has been a common justification for stock purchases over the past 2 decades or so.
The NSE 500 Total Returns Index (TRI), an accurate indicator of the larger Indian stock market that also takes dividends into account, produced an outstanding yearly return of more than 50% between the end of 2002 and the end of 2007. The India growth story was aggressively propagated during this time by people in charge of managing “Other People’s Money” and by those who are selling shares. However, the issue is that, despite the NSE 500 TRI only producing moderate returns of about 7% annually, these market players maintained this story over the next ten years, from the end of 2007 to the end of 2017 as well.
Therefore, regardless of valuation levels, the growth story of India has been promoted as a justification for stock purchases. This is significant because it causes a lot of individual investors to purchase stocks during periods when they are very costly, such as in 2007, which limits their medium-to long-term returns.
The substantial quantities of money now being spent on IPO investing indicate that these investors do not perceive alternative profitable investment options as being accessible to them. However, it may also be claimed that investors who are obsessed with stocks have become disinterested in alternative investment options due to the enormous gains that stocks have produced since March 2020. It is comparable to the fable of the chicken and the egg.
In fact, why would anyone bother investing in a small business or other financial investments if they could earn enormous profits by using a smartphone to invest in stocks while lounging at home?
Nobody knows how long this trend will last. But it’s important to remember what transpired in early 2008 following Reliance Power’s initial public offering (IPO), which was valued at an incredible amount. 2008 had 108 initial public offerings (IPOs), according to data. As of now (2024), the highest count of IPOs was 66 in 2010 and 63 in 2021. Actually, there were only 168 initial public offerings (IPOs) between 2012 and 2020. There is always a calmer period after every excess, however it is impossible to anticipate how long it will last.
Investors have to be wary of this IPO Frenzy:
Experts in the stock market think that one of the most undesirable ways to get into the stock market is to invest in initial public offerings (IPOs). To finance an expansion or to enable its original owners to sell their shares, a company may choose to go public. A firm would normally seek to time its initial public offering (IPO) during a bull market in order to receive the greatest price, and as a result, new investors purchase the company’s shares at a higher price. It should come as no surprise that IPOs are rarely seen when markets are weak, such as during bear markets.
The latest IPO trend in India is not new. Interest in India’s IPO markets was high during earlier bull market periods as well. Before the internet bubble burst in the 1990s, 74 companies went public. Almost 80 percent of those were IT companies. Today, just 18% of those remain. Likewise, the share prices of seven real estate companies that went public between December 2006 and March 2008 were 10% below their listing price when the 2008 financial and real estate stock euphoria faded. The prices of the other four were around their issue price.
The post-liberalization bull run of 1994–1995 was a similar narrative. The 1990 IPO of Infosys, which had trouble obtaining subscribers and went public before a bull run, was one that provided investors with multi-bagger gains. As a result, IPO investors were able to purchase the shares at a fair price. However, Infosys’ stock was selling at more than 200 times its profits during the tech boom in the late 1990s. Investors would have been nursing their wounds for a while if they had purchased the stock at such high prices in the late 1990s.
Buying or selling an over-hyped stock on listing day:
Investors find it challenging to get shares in an oversubscribed IPO that may be a blockbuster. However, the excitement excites ordinary investors, who purchase the shares on the day of listing. It is assumed that companies typically undervalue their shares in preparation for an IPO in order to allow for listing day profits. This story is supported by the fact that companies make listing day profits in bull markets. This might create the appearance that IPO investment bankers’ underwriters undervalue issues in order to attract new investors. However, in the stock market, and especially in bull markets, such occurrences are rare.
Since investment bankers usually receive a commission as a proportion of the sale, their motivation is directly related to the amount of money they are able to raise during an initial public offering. If a stock’s price rises on the day of listing, it’s not because the promoters gave new investors a chance to profit; rather, it’s because investors are afraid of losing out on the opportunity to profit from the stock markets. Put differently, promoters aim for high profits depending on the IPO price range. Fresh investors are paying more than what the promoters deemed a nice price if the share price continues to rise after listing.
Just 1,540 of the 3,122 initial public offerings (IPOs) that were introduced between 1961 and 2000 were still listed on stock exchanges in 2006. The others, either disappeared, were delisted, or were combined. Only 15% of the remaining 1540 equities were able to outperform the returns of the Sensex, and 50% of them had negative long-term performance.
Investors typically subscribe for initial public offerings (IPOs) in order to sell their shares on the day of listing and pocket their gains. Despite being aware of the high valuations, new investors intend to profit from the sale of the shares on the day of listing. However, the majority of stock allottees can have the same opinion on the day of listing, which is why some stocks fall on the listing day and don’t rise again for a while. Everyone believes that they will be the first to sell on listing and earn a profit, so they all subscribe to an IPO because everyone else is buying. Listing gains are the main reason why individuals invest. We refer to it as investment, but it’s really trading.
Final words – IPOs are winner’s curse:
IPOs are oversubscribed and list with gains in a bull market. Because of the herd mentality, inexperienced investors apply for every IPO in the hopes of making quick money. The winner’s curse, states that “these novice investors get all the shares they want of the poor IPO issues, but they get only a small allotment of good IPO issues”. This occurs when high-valuation problems arise, but savvy investors steer clear of them, whereas layman investors could acquire shares in a company with a low valuation because of the decreased demand.
As we all are aware, the process by which a private business becomes a publicly listed firm by making its shares available to the public is known as an initial public offering (IPO). Therefore, before making an investment in an initial public offering (IPO), investors should thoroughly review the company’s prospectus, financial performance, and risk considerations. In the early days of trading of these IPO listed stock, investors should also be mindful of the possibility of significant stock price volatility as well.
