India IPO Frenzy: 41 Firms File DRHP With SEBI In September 2024, Listing Gains Double; Buy Or Not?

India's capital market buzzed with activity as September 2024 witnessed a surge in initial public offerings (IPOs), with 41 companies filing their offer documents with the Securities and Exchange Board of India (SEBI). As of September 30, 2024, 67 companies have filed their Draft Red Herring Prospectus (DRHP) with SEBI and are awaiting clearance to proceed with their IPOs. Additionally, one more company is in the confidential pre-filing stage of its DRHP.

IPO Metrics and Market Sentiment

According to a report by Axis Capital, 2024 has been a year of strong IPO performance. Out of the 239 IPOs listed during the year, an impressive 175 companies opened above their issue price, signalling robust market demand and optimism. While 10 companies debuted exactly at their issue price, only 33 were listed below it initially. However, these companies quickly recovered, closing above their issue price by the end of September 2024.

As of September 30, 2024, 183 IPOs continue to trade above their issue price. This sustained positive momentum reflects strong investor confidence in the new market offerings. Retail investors, in particular, have been significant beneficiaries of the IPO boom.

Retail Investors Reap IPO Gains

Retail investors have experienced notable returns from participating in IPOs this year. Out of the 236 IPOs analyzed, the average listing gain for retail investors was 27%, an indication of the opportunities available to smaller, individual investors. By the end of September, the overall gains from these IPOs expanded to 114%, marking an increase in returns for investors who held onto their shares.

However, the trading behaviour of retail investors has been telling. SEBI's analysis revealed that 50% of the shares allotted to individual investors by value were sold within the first week of listing, with 70% of shares sold within the first year. This behaviour indicates a trend where investors seek to capitalize on quick gains, particularly when IPO returns exceed 20%. In such cases, investors sold 67.6% of shares by value within a week, compared to only 23.3% for IPOs that had negative returns.

This dynamic has driven a high volume of trading activity around IPO listings, further fueling market excitement and anticipation for upcoming IPOs. Investors seem more inclined to offload shares when they experience early gains while holding on to shares that may have dipped below their issue price, in hopes of a future recovery.

SEBI and RBI's Policy Impact

SEBI's policy interventions in April 2022 have had a profound effect on the IPO landscape, particularly for non-institutional investors (NIIs). These policy changes, along with the Reserve Bank of India's (RBI) updated guidelines on IPO financing by non-banking financial companies (NBFCs), aimed to ensure fairer participation in IPO allotments and curb speculative behaviour.

Before the policy updates, oversubscription rates in the NII category were as high as 38 times. This figure has now halved, dropping to 17 times. Additionally, the number of "big ticket" NII investors, applying for over Rs 1 crore in IPOs, has drastically declined. Prior to the new rules, there was an average of 626 such applications per IPO. Since the policy changes, that number has shrunk to just 20 per IPO. This shift suggests that SEBI's interventions have been successful in tempering speculative behaviour and promoting broader, more equitable participation in the IPO market.

As of September 30, 2024, several prominent companies have received SEBI approval to raise funds through IPOs, signalling continued strength in the market pipeline. Among the five major companies gearing up for their public debuts are: Vishal Mega Mart, ACME Solar Holdings, Mamata Machinery, Hyundai Motor India, and Swiggy Ltd. These companies represent diverse sectors, from retail and renewable energy to automotive and technology.