Opinion IPO market is booming, but don’t ignore red flags

The IPO (initial public offering) market in India continues to see a flurry of activity. Firms across a range of sectors, from LG Electronics to Tata Capital, are increasingly tapping the primary markets. And it’s not just the larger firms. In recent years, smaller and mid-sized companies, and even start-ups, like eyewear firm Lenskart, stockbroker Groww and fintech firm Pine Labs, are flocking to the markets. There are expectations of public offerings this year surpassing those of last year. Globally, India, along with the US and China, accounted for the bulk of IPO activity during the third quarter of the year as per EY. All this indicates the capacity of the Indian markets to absorb large issues.

There is a strong appetite from both institutional and retail investors; the latter are seeing participation beyond the Tier 1 cities. The sharp increase in the number of demat accounts over the past few years and the continuing surge in SIP flows are indicative of the growing share of household savings flowing into the markets. The stock market regulator had also recently made changes to the IPO framework that would help increase the participation of institutional investors. But this surge in liquidity sits uncomfortably with concerns over stretched market valuations. Questions have been raised over the steep valuations being sought by some of the companies. In the recent past, some of the IPOs have underperformed due to aggressive pricing — shares of many companies are trading around or lower than their offer price, as per some analysts. But, even IPO investors have invested for listing-day gains — as per an earlier SEBI study, individual investors sold 50 per cent of their shares within a week of their listing.

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The public offerings can be used for various purposes — for financing firms’ expansion plans or by existing investors such as venture capital or private equity firms to exit. Of the Rs 1.17 lakh crore raised this year, around a third represents investor or promoter exits as per a Kotak study. This suggests that promoters and early investors, who hold significant stakes, are using this opportunity to cash out, with the returns generated being either repatriated or deployed across asset classes. Recent reports indicate that the IPO pipeline remains healthy. The sentiment among retail investors also seems to be strong, even as the steep valuations, in some cases, are hard to ignore.