Moneycontrol Pro Panorama | Is the IPO frenzy over?

The high turnover rate indicates that investors are increasingly viewing IPOs as speculative opportunities rather than making decisions based on the fundamental strengths and prospects of the companies involved.

Dear Reader,

A troubling trend has emerged in India's primary market that raises concerns among investors and analysts alike. While the number of initial public offerings (IPOs) has soared to record highs, participation from retail investors and high net worth individuals (HNIs) has significantly dwindled.

According to a media report, the first 28 IPOs of this year averaged only 1.22 million retail applications, down a staggering 35.5 percent from 1.9 million applications across 91 IPOs in 2024. HNI participation has also taken a hit, declining by 31 percent per issue.

This decline in interest began after January, when retail bids peaked at an average of 3.2 million. However, between February and June, this number plummeted to just 780,000. Similarly, HNI applications fell from 235,000 to a mere 71,500 within the same timeframe. Alarmingly, eight recent IPOs failed to attract even 10,000 HNI applications.

Despite the drop in participation, most issues have managed to succeed in attracting investments, hinting at a potential problem lurking beneath the surface.

One significant issue affecting the Indian market is the culture of instant gratification prevalent among traders. A report from SEBI in September 2024 revealed that 54 percent of IPO shares allotted to investors, excluding anchor investors, were sold within a week of listing. Delving deeper into this data, it appears that 42.7 percent of shares allotted to retail investors and 63.3 percent of shares allotted to HNIs were sold almost immediately.

The high turnover rate indicates that investors are increasingly viewing IPOs as speculative opportunities rather than making decisions based on the fundamental strengths and prospects of the companies involved. As a result, increased volatility is often observed during the first week of trading, as a substantial portion of shares becomes available for trading right after listing.

While the allure of IPOs remains strong, it is clear that many participants are motivated more by the prospect of short-term gains than by a genuine interest in the underlying businesses. This has broader implications; as listing gains diminish, market participation inevitably declines.

According to the latest findings, this year's IPOs have yielded an average gain of only 13 percent on the first day, less than half of last year's 30 percent. Moreover, several investors have even reported losses upon debut. March marked a significant milestone, becoming the first month in two years devoid of a single IPO.

Market sentiment only began to improve after the Reserve Bank of India cut interest rates and global markets stabilised.

However, not all hope is lost. Historical patterns indicate that investor behaviour often correlates with market gains. Recent strong listings from major companies like HDB Financial Services, Crizac, and Ellenbarrie Industrial Gases may rekindle interest in IPOs. Though reduced participation currently dominates the scene, it's plausible that as market conditions improve, so too will investor engagement.

Despite numerous educational initiatives aimed at improving investor knowledge, many individuals continue to gamble their money for short-term rewards. This trend is mirrored in the options markets, where traders with a similar short-term mindset often face dismal outcomes—over 90 percent of them ultimately lose money due to a lack of understanding. Consequently, regulatory bodies like SEBI find it challenging to alter the ingrained behaviour of some traders.

For long-term investors, however, this exodus of short-term traders can create unique opportunities. It allows those with a steadier approach to enter stocks they may have missed during the IPO allocations, ideally setting the stage for a more stable and strategic investment landscape in the future.

While the current situation in the primary market may seem precarious for retail investors and HNIs, there is potential for a turnaround. A focus on long-term investment strategies and a deeper understanding of market dynamics could pave the way for a more robust participation in the IPO landscape, benefiting both investors and the overall market health.

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