BENGALURU — Indian entrepreneurs are making windfalls in initial public offerings, but about one-fourth of the companies that hit the bourses amid a rally beginning in 2021 have tanked, raising questions about whether the bull market triggered overpriced IPOs.
Between 2021 and 2023, entrepreneurs — called “promoters” in local parlance — sold shares worth 814.24 billion rupees ($9.8 billion) in IPOs on India’s two main exchanges, the Bombay Stock Exchange and the National Stock Exchange. This was 2.4 times more than the IPOs between 2018 and 2020, according to the public market data provider Prime Database.
But 44 of the 183 companies that listed since 2021 are trading below their offer price, incurring losses for investors who backed the IPOs, and analysts are questioning whether some promoters were in a rush to take advantage of the stock market rally. India’s benchmark Sensex index has jumped 55% since 2021.
“In a bull market, you get scenarios where promoters bring out IPOs even when they don’t really need the money, and overprice the IPOs as much as possible,” said Abhishek Basumallick, founder of the investment firm Intelsense. “Is everybody trying to do that? I don’t think so. But are there such people? Definitely yes.”
Promoters cut their stakes at the time of the IPO in seven out of the 10 companies that later experienced the steepest falls, according to Prime Database.
The payment solutions provider AGS Transact Technologies, where almost the entire IPO proceeds of 6.8 billion rupees went to the promoters, recorded the sharpest drop in share prices: 56%. Its IPO was oversubscribed by about eight times. Shares in the electric motor manufacturer Elin Electronics, whose promoters accounted for a quarter of the total IPO proceeds of 4.75 billion rupees, fell the least, at 33%. That IPO was oversubscribed by three times.
The consultancy EY estimates that India had more stock market listings in 2023 than China and Hong Kong. The IPO boom is driven by a buoyant stock market that outperformed peers in China, Hong Kong and Japan. Analysts say that rapid economic growth, a spurt in government spending on infrastructure and a general aversion to bankrolling Chinese companies amid geopolitical tension all underpinned India’s rally. Rate cuts by central banks around the world to spur consumption also helped, prodding foreign institutions to line up for Indian equities.
The market rally, coupled with a proliferation of trading apps such as Zerodha and Groww, encouraged thousands of retail investors to pick equities over traditional investments like real estate, gold and bank deposits. The number of trading accounts in India topped 150 million in fiscal 2024, ending this March, triple the 55 million three years ago. Simultaneously, annual investments in systemic investment plans of mutual funds doubled during this time to 1.99 trillion rupees.
Aveek Mitra, founder of the investment firm Aveksat Financial Advisory, said there is “nothing right or wrong” with promoters taking advantage of IPOs to pare their shareholding, as they could be looking for liquidity after being in business for years. But “there will be lot of crooks looking to make money when the market goes up, like what happened with special SPACs (special purpose acquisition companies) and bitcoins,” he cautioned.
Mitra said some sectors, including defense and railways, are frothy because “these are all government projects, with no certainty that cash flow will come in time — or even that the company will be able to deliver.”
“But to expect that valuations will correct just because it has reached a frothy level, it never happens like that,” he added.
The heightened interest in Indian equities had an unusual beneficiary in small and medium-size enterprises (SMEs), which would have otherwise found it challenging to attract public investors. They list on a separate platform where fundraising is capped at 250 million rupees.
“Capital wasn’t readily available for early-stage companies,” said Nitin Bhasin, head of institutional equities at the investment firm Ambit. “For the first time, such companies are finding a lot of capital. Otherwise the companies that were able to get money were large and matured.”
Some of the IPOs for such smaller companies were massively oversubscribed. For instance, Kay Cee Energy & Infra, which builds power transmission systems, had a 159 million rupee IPO that was oversubscribed by 1,052 times, while the 200 million rupee share sale by Maxposure, a media company focused on airlines, was oversubscribed by 987 times.
But the unprecedented boom in this segment also spawned unwanted consequences, with the stock market regulator saying in March that it suspected stock market manipulation in the IPOs of some SMEs.
“Many of those companies have very questionable business models,” said Basumallick of Intelsense. “A lot has happened in the SME IPO space where there is no particular intent of using the money but the mindset is that ‘Since I am getting it, I will take it.'”
Promoters sold shares worth 4.71 billion rupees in the IPOs of SMEs between 2021 and 2023, about 1.5 times the level between 2018 and 2020. As many as 117 SMEs that listed since 2021 have slipped, with shares of the top 10 losers dropping between 67% and 90% of the offer price.
But that is not the only regression that is worrying the regulator. In November, it flagged heavy losses incurred by traders in futures and options.
According to estimates by the regulator using the latest data available, the number of futures and options traders in India surged by six times to 4.5 million from fiscal 2019 to 2022 — yet in 2022, about 9 out of 10 such traders lost money. The regulator pegged average annual 2022 losses at 110,000 rupees ($1,320), no mean sum in a country where the World Bank estimates that the gross national income per capita is $2,390.
Analysts are hopeful that the stock market’s bull run will continue.
Gaurav Sood, managing director at the investment bank Avendus, said he expects several big-ticket IPOs with asks of over $500 million to be floated after the ongoing general elections are over.
“A lot of companies are preparing for an IPO, a lot of pitches are happening, mandates are being given to investment bankers,” said Sood. “Capital markets people say this is probably the best time in their careers in the last 20 years. Public markets will slowly start moving towards large caps, this is the theme that will unfold this year.”
source : asia.nikkei