2021 has witnessed an increase in IPOs (initial public offerings) in India and globally. According to Ernst and Young’s 2021 Global IPO Trends Report, 2,388 IPO deals raised $453.3 billion globally in 2021, up 60% by volume and of product compared to 2020. In India, 63 companies got involved. ₹1.19 trillion via IPOs, more than four times the amount raised in 2020 ( ₹26,628 crore).
The major drivers that have propelled India’s IPO market are new-era tech start-ups, protracted low interest rate environment, strong retailer participation, and India’s growth story. Of the amount raised through IPOs, a substantial portion ( ₹75,736 crore) was for the offer to sell (OFS) and that is a cause for concern. Also, the purposes of an IPO are “general purpose,” which means investors won’t be able to gauge how the money will be used by the company. To address these concerns, the market regulator, the Securities and Exchange Board of India (Sebi), has recently introduced some reforms, including a cap on OFS by existing shareholders and prohibiting the use of IPO proceeds. for the acquisition unless the target is identified in the prospectus.
The resources raised through IPOs are either new issues, OFS or both. In a new issue, the proceeds of the issue accrue to the company while in the case of OFS, the securities held by the existing shareholders of an unlisted company are offered to the public.
The funds raised by new issues are likely to stimulate economic activity and contribute to employment and returns to all factors of production. But, the amount raised by OFS will mostly go into the hands of existing shareholders who may or may not return for new investments. In a new issue, the company has additional capital at its disposal, while in an SFO the proceeds are pocketed by existing shareholders.
In 2021, new issues worth ₹44,146 crore constituted 36.82% of the total funds raised (only 4 issues out of 63 were 100% new issues with no SFO component). The stated purpose of these new issues was to raise capital for the expansion of production capacity; general corporate purpose; reduce total outstanding borrowings and reap the benefits of listing. These goals fit well with the theory that IPOs enable a country’s economic growth.
No less than 59 numbers were a combination of new numbers and OFS. The OFS component of emissions in 2021 is ₹75,736 crore. From an economic development point of view, there is no visibility on how this sum will be deployed. There were 15 companies that raised resources through the 100% OFS route, while the issue size of 49 companies had more than 50% of the OFS component (Table 2).
It is observed that around 50% of the total IPOs in 2021 resulted in the exit of private equity (PE) and venture capital (VC) firms or early stage investors. This trend has been seen in the Indian IPO market for the past 6-7 years. This trend suggests that the Indian capital market is facilitating the start-up movement by providing an exit for PEs and VCs, which could be helpful for next-generation entrepreneurs.
A substantial part of the money raised by public issues helps PE/VCs or family offices to withdraw capital and there is no visibility that the funds thus withdrawn are reinvested in constructive investments. Perhaps, to solve this problem, Sebi recently proposed that in an SFO, majority shareholders (defined as holding at least 20% of the pre-issue stake) could only sell up to 50% of attendance.
Capital raised through public offerings should be deployed productively. Sebi’s reform measure capped the percentage of funds allocated to the acquisition of unspecified businesses, or indicates specific targets in the prospectus. Specifically, there would be a cap of 35% of the total issue size on the combination of allocation to future inorganic growth and “general business objectives”. The fund allocation cap for unidentified acquisitions only is set at 25% of the issue. It is also proposed that rating agencies monitor the use of proceeds from public issues.
Another important trend is the involvement of retailers. Cumulative demat accounts increased from 36 million in March 2019 to 77 million in November 2021. Individual retail investor applications simultaneously increased from 8 million in 2019-20 to over 70 million in November 2021. The concern is whether retail investors invest in IPOs understand the underlying purpose of the offering. Perhaps it could be the participation of benchmark/QIB investors that gives retail investors confidence to underwrite IPOs. To ensure that anchor participation is not misleading, Sebi recently increased the lock-up period from 30 days to 90 days for a portion of shares held by anchor investors. Additionally, as the time from IPO allotment to stock market listing is only 7 days, retail investors who do not have a deep understanding of the company’s business model issuer should wait for the quote and make a purchase decision. or not to buy those shares based on the market’s valuation of the company.
It would be interesting to see how the IPO market will adapt to the recent reform measures announced by Sebi.
The authors work at the National Securities Markets Institute. Views are personal.
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