SEBI chief Tyagi cautions retail investors on IPO market frenzy

Securities and Exchange Board of India (SEBI) Chairman Ajay Tyagi said on September 16 that the initial public offering (IPO) market price discovery was not as transparent and efficient as secondary market price discovery.

Speaking at the inaugural session of the 12th edition of Financial Markets Summit - organised by the Confederation of Indian Industry (CII), Tyagi added that retail investors should focus more on secondary market since disclosures for already listed companies are much more.

Investor frenzy over initial public offerings (IPOs) that started with a recovery in the secondary stock markets and the revival in the economy in the second half of 2020 continued into this year and has turned out to be better in terms of funds raised and number of IPOs.

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So far in 2021, 41 companies have raised Rs 64,244 crore, of which the stocks of 16 such companies are trading above the issue price, according to ACE Equity data.

Funds raised via IPOs in FY22 till-date are almost equal to what was raised in FY21, which was Rs 46,000 crore, the SEBI Chairman said. During the last 18 months, technology companies have raised 15,000 crore through IPOs.

An additional 25-30 companies are expected to come out with IPOs in the remaining months of 2021. Companies from food delivery, digital services, payment banks, analytics, trading and service platforms to niche segments and chemical makers don’t want to miss the chance to raise funds for expansion and working capital, apart from giving their marquee investors an exit option.

Tyagi said filings with the market regulator showed an IPO pipeline of around Rs 30,000 crore.

While most IPOs in 2021 have been successes in terms of oversubscriptions and opening day pops, not all are convinced by this rush. Data compiled by JST Investments, in the five years to 2021 (data as on 9th September), majority of the money raised through IPOs were in the offer for sale segment. In other words, companies were not so much raising money for expansion as for providing an exit to early shareholders.

Meanwhile, Aswath Damodaran - one of the finest minds globally on valuation and markets - believes that many IPOs like Zomato and Paytm, Delhivery, Nykaa, Flipkart want to go public because "the mood is right."

"But at the same time, they're not designed to be healthy, successful businesses, even in the long term. I mean, I call this the big market delusion using the notion that there's a big market out there, you push your company out, people buy your shares, but then they realize it's hard work building a business to take advantage of a big market," Damodaran, a Professor of corporate finance and valuation at NYU's Stern School of Business told Moneycontrol in an interview.

Zerodha founder and CEO Nithin Kamath believes that the risk with all the high growth B2C technology IPOs coming up is growth plateauing.

"Growth is usually a function of agility & product bets. Since these companies take more bets & are more agile & aggressive than traditional businesses, they grow faster," Kamath had said in a series of tweets.

The question then, will the ability of these companies to be agile(reason for growth) reduce because of all the scrutiny that comes by being publicly listed? US companies have managed this pressure well. But it is a more mature market. Need to see how this plays out in India. 2/4

— Nithin Kamath (@Nithin0dha) July 12, 2021

"We're in a world where no valuation seems too high as long as there is growth & a large addressable market. If you were old school and looked at revenues & profits, you would have missed out on some of the best public (US) and private companies(US and India), in the last decade," he said.