The IPO Boulevard

For the financial market, 2021 began with a big bang with the government announcing to sell stakes in the country’s largest insurance company Life Insurance Corporation (LIC). That was the beginning of a flood that’s waiting to sweep through the capital market this year with at least 40 companies planning to mop up Rs 80,000 crore by floating public issues.

If the announcement of listing LIC was the trigger for the tide, then the biggest wave so far has been the Zomato public issue. The food delivery app raised more than Rs 9,000 crore from its initial public offering (IPO). It was the largest after the Coal India IPO, which had raised Rs 15,000 crore.

But records are fairly meant to be broken. The wave swirling up is the next big daddy – the Paytm IPO – that’s aiming for a record Rs 16,000-crore tsunami in the capital market. The Zomato and Paytm public issues have unleashed a barrage of start-ups readying to take a plunge into the securities space. Those lined up for stake sale this year include the marques like Ola and OYO.

In step with the Corporate India’s rush to raise funds, the government too has beefed up its offerings, sending two state-run banks and a public sector general insurance company on the block. The dilution of government holding will help India close in on its projected divestment target of Rs 1.75 lakh crore for the financial year 2021-22. The LIC listing alone is expected to contribute Rs 1 lakh crore to this.

Most of the companies going to float public issues have their blueprints in place to expand or consolidate their businesses. The outbreak of Covid-19 had stalled major business activities for large parts of 2020-21. As the Indian economy began limping back towards normalcy, businesses shrugged off the pandemic blues and started gathering momentum. Investors, too, have jumped for a ride on the charging bulls in the capital market.

“There’s a kind of euphoria in the IPO market as most issues are generating an absolute return of 40-100 per cent on the listing day itself,” says Amit Jain, Chief Strategist at Ashika Group and Co-Founder of Ashika Wealth Advisory. “FY2021-22 may have record fundraising by Indian corporates as Indian investors have accepted the new-age business models as part of their investment portfolio. These new-age business models like Paytm, Zomato, Mobikwik are accepted globally, which focus on market share for an initial 10-15 years and then become market leaders to dictate terms and pricing of their products and services.”

The concept of raising funds goes back perhaps to the age of The Merchant of Venice. But as borrowers became afraid of losing their pounds of flesh to the Shylocks, angels flew in to help the Antonios make their dreams a reality.

Now crowned as angel investors, who throw the lifeline to start-ups, go back over four decades down the financial history of business. In 1978, William Wetzel, then professor at the University of New Hampshire and founder of its Center for Venture Research, did a pioneering study on how entrepreneurs raised seed capital in the US. He was the first to use the term ‘angel’ to describe the investors who supported them.

A clutch of private equity investors emerged in the US in mid-1900s, investing capital into companies showing high growth potential, in exchange for an equity stake. They were called venture capitalists. Accel Partners set up shop in India more than three decades ago, marking the debut of VC firms in the Indian capital market.  

Down the years, the practice of fund raising have evolved, creating various ways for businesses to support their growth strategies until the first modern-day IPO was floated. Although the first publicly traded company goes back to the 17th century, when Amsterdam-based Dutch East India Company sold its stake to investors to raise funds for its shipping voyages to faraway lands. The company shielded investors from assuming any losses above and beyond the amount of their individual investments and encouraged others to speculate part of their capital.

In India, the Reliance Industries IPO was the first mega public issue. Floated in 1977, the issue was oversubscribed by seven times. Oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand.

“In those days, before the IPO was fine-tuned, the refund process in case of oversubscription was tedious. It almost took an entire year for Reliance Industries Ltd to repay the investors,” says Moloy Biswas, Regional Manager at Central Depository Services India Ltd.

There were few more public issues and the investors had to suffer delays in repayments. With investors losing their interest proportion in the process, national markets watchdog Securities and Exchange Board of India (Sebi) stepped in to frame a rule to safeguard investor interests.

ASBA, or Application Supported by Blocked Amount, was introduced by Sebi in September 2008. It is an IPO application containing an authorisation to block the application money in a bank account for subscribing to an IPO issue. It aimed to make the process of submitting IPO applications hassle-free for the investors and streamline the long waiting period for refunds.

ASBA eliminated the process of paying upfront. Now, when an investor commits a certain amount to a public issue, it is blocked in his or her account and it cannot be withdrawn. The charges are debited once the shares are allotted and the remaining amount is unlocked immediately.

The capital market classifies IPO investors in three categories – Qualified Institutional Bidders (QIB), High Net-worth Individuals (HNI), Retail Individual Investors (RII). Under the QIB category, public financial institutions, commercial banks, mutual funds and Foreign Portfolio Investors (FPI) can apply and 50 per cent of the offer share is reserved for QIBs. Resident Indian individuals, eligible Non-Resident Indians (NRI), Hindu Undivided Families (HUF), companies and corporate bodies, who apply for more than Rs 2 lakh worth of IPO shares, fall under the NII category. Fifteen per cent of the offer is reserved for the Non-Institutional Investors (NII) category. Those who can apply for less than Rs 2 lakh come in the RII bracket, with a quota of not less than 35 per cent.

The Indian IPO market suffered a major setback in the YES Bank scam in 2005. The Rs 31,500-lakh issue set 700 lakh shares on sale and 1.75 crore shares were reserved for small investors. Around 13 entities had obtained the IPO shares and made applications in the retail categories through thousands of fictitious applicants. The scamsters – Rupalben Panchal is the most infamous of them – opened several dematerialisation (demat) accounts and applied for shares from many benami accounts. With the scars of the 1992 Harshad Mehta scam and the 2001 Ketan Parekh scam yet to heal, the market regulator reacted sharply after the YES Bank fiasco. “It was soon announced that RIIs and NIIs cannot make more than one application each,” says Biswas.

As the Indian capital market matured, it was shaken by repeated scams like the dot-com bubble of early 2000s, the global financial crisis of 2008-10, and the European sovereign debt crisis of 2009-10. The IPO market was hit hardest by the global recession and went into a state of coma for some years when listings became rare.  

“A mad rush for IPOs has always been there. Several promoters raised money from the public and vanished. In fact, 1990s were characterised by many fraudulent activities like this. Over the years, regulations and enforcement actions became stronger,” says Pranav Haldea, Managing Director at Prime Database Group.

Along the road to a more organised and stronger market, the IPO space has evolved greatly. There is a change in the pattern of companies launching issues as well. Earlier, it used to be greenfield companies that would go for listings, but now, many well-established companies too are joining the bandwagon to raise funds for their brownfield expansion plans. Most of them are funded by private equity and venture capital investors, according to Haldea.

The fate of the listing used to hinge mostly on the company’s financials earlier but now much of the success of a public issue depends on the campaign the company carries out. “The success of an IPO depends on the success of the roadshow,” says Biswas. When a company goes public, the members responsible for issuing the IPO travels around the country with a roadshow to showcase the investment opportunity to potential investors.

To widen the market further, Sebi has amended a host of rules over the years. “Earlier, Sebi wouldn’t allow non-profit-making organisations to file for IPOs. But the regulations were changed recently, and many loss-making companies were allowed to launch public issues as long as a greater amount is reserved for institutional investors,” points out Haldea. Zomato was in the red when it announced plans for floating its maiden public offering.  

Historically, the primary market, where IPOs are sold, had an intricate relationship with the secondary market, where securities are traded. With the secondary market shuddering out of the pandemic stalemate and hitting record highs, the primary market, too, has begun rallying.  

“Since secondary markets are performing well on grounds of global liquidity, I expect the actions on the primary markets to continue at a good pace as well. But a correction in the secondary market might lead to a slowdown in the primary markets,” predicts Haldea.

As Indian tech start-ups make a beeline for the bourses, many feel a change in the trend is awaiting in the IPO space. It’s not just the tech firms and start-ups, companies from a host of sectors have joined the IPO rush this year.

“So far we have seen only tech-driven companies opening their IPOs. But, others like pharma and biotech have already supplemented the trend, and I predict an expansion of education, BFSI, and fintech companies,” says Nilanjan Dey, Director, Wishlist Capital. “I see variety, diversity, and too much in favour of technology-edged companies, which should change to bring an equilibrium in the market.”

Indrishka@outlookindia.com