Individual investors sold over 50 per cent of shares allotted to them by value within a week of listing, and 70 per cent of shares by value within a year, a regulatory study has found. This has buttressed the fact that investors in initial public offerings (IPOs) are a fickle lot who come in mostly to make quick gains.

The Securities and Exchange Board of India’s (SEBI) latest study collated data from 144 IPOs listed between April 2021 and December 2023. About 70 per cent of the IPO investors were from Gujarat, Maharashtra, Rajasthan and Uttar Pradesh.

The study found a strong disposition effect, with investors more likely to sell IPO shares with positive listing gains than those with losses. When returns exceeded 20 per cent, individual investors sold 67.6 per cent of shares by value within a week, while NIIs sold 79.1 per cent. In contrast, only 23.3 per cent of shares were sold when returns were negative.

Instituitional exits

Mutual funds held IPO shares for longer than banks, with the former selling about 3.3 per cent of allotted value within a week compared to 79.8 per cent for the latter. FPIs, individuals and MFs exited more in issues having issue size less than ₹1,000 crore. FPIs exited more in ‘promoter seller’ IPOs than other types. For individuals, the exit from IPOs roughly doubled from the oversubscribed IPOs in the range 5x-10x, compared to those in the range of 1x-5x. The number of shareholders in the 87 IPOs that completed a year dropped significantly within the first two days of listing but stabilised after about a month.

In 2022, the share allotment methodology was changed from pro-rata basis to a lottery system for non-institutional investors (NII) and the NII category was subdivided into two, one with applications of ₹2-10 lakh and another over this figure. The RBI introduced restrictions on IPO funding by NBFC up to ₹1 crore per borrower.

These policy changes have led to a reduction in the over-subscription under NII category from 38 times to 17 times and a decline in number of IPO applications by those applying for more than ₹1 crore in IPOs from around 626 applications per IPO in pre-period (April 21-March 22) to 20 applications per IPO in the post period (April 22-December 23). The exit of such investors within a week dropped from about 70 per cent pre-period to about 25 per cent in the post period.

Of the 144 IPOs listed during April 2021- December 2023, 108 delivered positive returns and 26 delivered more than 50 per cent listing day gains. As many as 92 IPOs were oversubscribed more than 10 times.

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