Unless a rodeo, ride the bull cautiously


Several companies are getting listed on national stock markets and 2021 has seen the highest number of IPOs in a decade.

The Initial Public Offerings (IPO) fever and bullish run of the Indian stock markets have resulted in 74 IPOs in 2021, which is the highest number of IPOs in a single year, in more than a decade.

The previous record for highest number of IPOs was in 2007, with 104 listings.

The companies clocked an all time high of Rs. 1,03,098 crores in 2021. The previous best in the last 15 years being Rs.75,279 crores in 2017.

CA Souvik Mohanty, Associate at a major equity research house said, “A lot of companies are trying to get listed to benefit from the IPO fever which has caught up the Indian investor.”

Notably, a significant rise in DEMAT accounts has also been witnessed in the current year, as more people try to enter stock markets as investors.

Mohanty also explained that a lot of existing Private Equity (PE) firms/Venture Capital (VC) investors also want to dissolve their position during the bull-run. Hence, a lot of companies are selling their already existing shares – owned by such PE/ VC investors – through IPO. This is technically termed as an Offer for Sale (OFS). There have been several companies,for instance, Nazara Technologies Limited, that have not issued fresh shares and their entire IPO was an OFS.

Rajeswara Rao, a High Networth Individual (HNI), and a Partner at Rana Enterprise, an investing firm , explained the reason behind such high investments by PE firms and VCs. “When the markets are in bull mode, everybody will want to invest. Also investors tend to invest more in startups that are well-known publically such as Ola, Zomato, Paytm.”

He added,”And the investors sometimes also have a deal wherein if the market prices don’t increase as pre-decided, they ask the issuer to buy back the shares. So, they are not much as worried about the fluctuations in prices as retail investors.”

According to India IPO Trends report by consultancy firm Ernst and young(EY), the fact that Securities and Exchange Board of India (SEBI) has eased out norms for ‘minimum public offer’ and mandatory ‘requirement of public shareholdings for large issuers’ has also resulted in the ease for companies to list their shares on stock markets.

Company Secretary Sagar Batra, Associate at J Sagar Associates, explained the implications of the amendments. “The primary reason to ease out the norms was to support startups that are majorly funded by promoters or PE funds. Previously, lot of digital and tech startups would try to list on overseas stock markets. But, with such amendments, they are trying to launch their IPOs in India.”

The report also stated that technology, healthcare, and consumer products and retail are the most active sectors in current year to go public.

However, while several norms are eased out, the overall compliances for a company to launch an IPO are not easy. Batra highlighted the basic compliances that companies should keep a check on, while planning for an IPO. “Issue of Capital and Disclosure Requirements (ICDR) establishes  eligibility criteria that companies should work upon.Also they should ensure appropriate preparation of Financial Statements  three years prior to the IPO. This will make it easier for companies to prepare their offer documents.”

Meet Shah, owner of a sub-broking firm Right Investment Services explained the primary reason for such an IPO rush amongst the companies. “Valuations [in the market] are currently high and the market sentiment is too bullish. So the companies can get extra premium [on the issue price of shares] as compared to normal market situation.”

However, Reserve Bank of India’s monthly bulletin expressed  concern over the record breaking performance of stock markets in recent times. It states that the Indian equity market has outperformed major equity indices around the world in 2021 so far. However, the spectacular gains have raised concerns over the overstretched valuations as severalglobal financial services firms have warned against Indian equities.

Mohanty explained, “Indian markets are overvalued at this point of time across all the major markets of the world. Everybody is sceptical about the valuations and are expecting a correction anytime soon.”

Correction of the market means that the market is currently overvalued, and a fall in stock market indices is expected in near future, said Mohanty.

SENSEX, after reaching the highs of 60,000 points around November 15, 2021, has fallen to 57,065* as on November 30, 2021. During the same period, NIFTY has fallen from 18,109 to 16,983 points.

Mohanty said that thisshall be considered as an indication of correction of the stock market indices., The high levels that we saw during mid-November will not be seen for next 40 to 50 days at least.”

Currently, DRHP (Draft Offer Document) of 50 companies is in the pipeline, to be processed by SEBI. Two IPOs are live ending on December 2 and December 3, respectively. Hence, several more listings are expected by end of the year, based on approvals by SEBI.