Latest Trends in the Indian IPO Shabang, Get All Details Here!

2021 was a year that will go down in stock market history for the sheer volume of IPOs floated and the amount of money raised through them. According to a Global IPO Trends Report from Ernst and Young, around 2388 IPOs took place in 2021, which is 60% more in proceeds and volume when compared to 2020. In fact, these IPOs managed to raise $453.3 billion globally.

On that note, let’s look at some of the trends concerning the Indian IPO market.

Indian IPO Trends

63 companies went the IPO route in 2021, raising Rs. 1.19 trillion, four times more than the amount raised in 2020.

What are some of the factors that propelled the IPO market in India? In a nutshell, we have listed them below:

• Technological start-ups
• Low-interest rate period
• Robust retail participation
• General predominance of growth in India

However, there is much more to this rosy picture of prosperity and growth.

Predominantly, the IPOs had an offer of sale (OFS) rather than a new issuance of equity shares. This is a concerning matter. Moreover, there were plenty of IPOs with a “general purpose” objective statement. It implies that the investors will not know how the company in question used the money.

It is these 2 worrying signs which have led SEBI (Securities and Exchange Board of India) to introduce certain reforms. Some of these reforms include:

• OFS cap by existing shareholders
• Companies should specify their acquisition targets in the prospectus.

Difference Between OFS and New Issuance of Shares

There are two ways in which capital is raised in an IPO. They are through Offer for Sale (OFS) or fresh issuance of shares. In a new issue of shares, a company is the ultimate gainer, as all funds go to it. However, in the case of an OFS, the promoter or existing shareholder gains this capital.

Any funds raised by the new issue is likely to spur economic growth, but the capital raised from OFS will go into the pockets of the existing shareholders, which they may not reinvest into the company.

However, there is an alarming trend in the IPO. Only 4 out of 63 IPOs were purely fresh issue IPOs. Moreover, the objectives of these IPOs were to raise capital for:

• Achieving benefits of listing
• Reducing borrowings
• General corporate needs and expenses
• Expansion of production capacity

These reasons line up with the fact that IPOs propel the country’s economic growth.

However, most of the IPOs saw Private Equity firms and venture capitalists exit the companies. This trend has been alive in Indian IPOs for 6 to 7 years.

Since there is so much withdrawal of capital and no sign of it being put back into the country, SEBI has decided to cap OFS at 50% of the stake. This means any majority shareholders can sell only up to 50% of their stake.

Companies to State Clearly How They Propose to Utilise Funds

SEBI has said that there will be a 35% cap on allocating funds for general corporate needs and inorganic growth. Moreover, credit agencies will monitor the utilisation of funds.

There is also a concern about whether retail investors understand the risk of investing in an IPO. It is suspected that retail investors’ confidence is because of the anchor investors or QIBs. Therefore SEBI has increased the lock-in period from 30 to 90 days for anchor and QIB investors.

Bottom Line

SEBI’s guidelines protect both retail investors and IPO bound companies from making too many losses. However, given these new measures and protocols, it remains how the markets will adapt to the changes.

Source: Live Mint

Frequently Asked Questions

1. How many companies were purely OFS in the IPOs of 2021?
   Ans. In the IPOs of 2021, 15 companies chose the purely OFS path.
2. How much was the OFS component in the 2021 IPOs?
   Ans. The OFS component in the IPOs of 2021 was Rs. 75,736 crores.
3. How much was the new issuance component in the 2021 IPOs?
   Ans. Rs. 44,146 crores was the new issuance component in the IPOs of 2021.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.