Indian households have taken to equities like ducks to water since Covid, but the rising equity appetite has been accompanied by a hunger for immediate gains. A Securities and Exchange Board of India study chronicling the behaviour of investors in Initial Public Offers (IPOs) launched between April 2021 and December 2023, spotlights this trend.
On examining 144 main board IPOs, the study found that 50.2 per cent of shares allotted to individual investors were sold within a week of listing. Half the retail investors who bagged IPO allotments have opened their demat accounts post-Covid. This is an unhealthy trend, because index funds or bluechips are a far better investment for new investors than IPOs from untried firms. But Indian investors have traditionally made their market debut with IPOs. In a classic case of loss aversion, they held on longer to IPO shares that delivered poor returns while quickly cashing out of those with high returns. They also flipped their shares more in IPOs over-subscribed by 10 times or more. These trends show retail investors viewing IPOs as a speculative gamble rather than as a long-term bet.
But these trends do not call for regulatory intervention. For one, the primary market is the main conduit through which unlisted firms can formalise and raise equity capital. A thriving primary market is critical to a vibrant secondary market. Main board IPOs managed to raise ₹2.13 lakh crore in this period; therefore, it is best that the regulators do nothing to interrupt this. Regulatory actions taken by SEBI and Reserve Bank of India in 2022 have already moderated IPO froth. RBI capped the NBFC financing to IPO applicants to ₹1 crore per borrower and SEBI shifted the basis of allotment in the non-institutional (NII) category from proportionate allotment to a lottery system. These steps have reduced IPO over-subscription numbers on the main board and trimmed the share of big individual investors in the NII category from over 98 per cent to under 10 per cent. Two, while retail investors are mainly into IPOs for flipping, the shares they sell are landing with mutual funds, who should know better. Three, many IPOs in peak bull markets are over-priced, and retail investors cannot be faulted for trying to make the most of it. Of the 144 IPOs in this period, 43 per cent offers were from new-age companies which weren’t profitable and 65 per cent were offers for sale by promoters or existing investors.
With regulatory curbs on the main board, the speculative action seems to have shifted to the SME platforms. Guardrails for SME IPOs have been deliberately kept low, with a lower bar on financials, disclosures and pricing. SEBI has warned about tiny companies getting hyped. But retail investors, undeterred by the ₹1 lakh lot size, have been punting on them. It may be best to let caveat emptor operate, so that investors can learn from experience. SME platforms have spawned sharp operators, but they have also opened a route for genuine SMEs to raise equity capital.