Demystifying the IPO boom of 2020-21

Updated: Sep 30, 2021

A slew of Indian companies have been queuing up to go public this year. The amount of money raised through IPOs this year touched $8.8 billion at the end of August, and now, the outlay has gone beyond that of the last three years. But, what is the impetus behind this? Read on to find out.

 

Just like the deluge of rain on rooftops during monsoons, we have seen a torrent of Initial Public Offerings (IPOs) in 2021. From Zomato, Indian Railway Finance Corporation Limited (IRFC), Stove Kraft, to Ease My Trip, and CarTrade Tech, the Indian stock market has witnessed more than 40 IPOs this year. And, this is not culminating anytime soon. Nykaa, Delhivery, Aditya Sunlife and many more have joined the club and made an application to SEBI as well as the stock exchange. The statutory insurance giant, Life Insurance Corporation of India (LIC) alone is slated to produce around Rs 70,000 crore.


The amount of money raised through IPOs this year touched $8.8 billion at the end of August, and now, the outlay has gone beyond that of the last three years. The exemplary performance of the stock market coupled with the increased participation of first-time investors, especially high net worth individuals, are some of the reasons why companies have been applying for IPOs specifically at this time.


Illustration by Jyothi Syam


The Bombay Stock Exchange’s Sensex has climbed up by 97 percent from 29,468 on March 31, 2021, to 58,159 as of 13 September. According to the State Bank of India (SBI) report published by the Centre for Monitoring Indian Economy (CMIE), more than 14.2 million individuals were engaged in investing in the stock markets in 2020-21.


Due to the periodic lockdowns and job losses during the COVID-19 pandemic, a lot of young Indians were stuck at home with an ample amount of time to spare. And, thereafter, many of them began kicking off equity investments.


Thanks to technology as well as social media, their journey was made easy. From Reddit groups, stock tipping chats on Whatsapp and Telegram to videos on Instagram and Youtube, there was no dearth in the flow of information. Further, trading platforms like Zerodha, Upstox PRO and Sharekhan enabled millennials to access the stock market quickly and conveniently.


The SBI report also indicated other ancillary rationales for the IPO boom - a rise in global liquidity as well as a shrinkage in interest rates of fixed deposits (FDs) and small savings schemes such as Public Provident Fund, Sukanya Samriddhi Yojana (SSY), Senior Citizens Savings Scheme (SCSS), and National Savings Certificate (NSC).


Gokul S, Investment Advisor, who works with a Bengaluru-based investment advisory firm Shree Sidvin Investment Advisors Private Limited, explains this in detail.

“The coronavirus health crisis led to an increase in gold prices, but subsequently, the yellow metal kept losing its sheen. Not many seem to be investing in real estate owing to the huge capital requirement, employment insecurity and discomfort associated with taking loans. And, the interest rates on fixed deposits stands at around 5.5 percent, which is not very lucrative. So, the TINA (There Is No Alternative) factor is in play. Hence, people started putting more money into equity, based on the last 1 year returns and the markets have been quite bullish. Evidently, this is the best time for companies to come out with an IPO,” Gokul says.

Is SEBI’s relaxation on issues playing a role?

On 17 February, 2021, The Securities Exchange Board of India (SEBI) eased listing norms for large companies and said that they could now divest a minimum 5 percent in an IPO, instead of the earlier set 10 percent. Further, the regulatory body announced a timeline of five years, rather than three, to raise the public float to 25 per cent.


SEBI also approved a relaxation in the lock in period for promoter’s shareholding in companies that go for an IPO or FPO. It reduced the period to 18 months from the date of allotment of shares instead of three years, but, under a few conditions. The precedent is applicable only in cases where the IPO is fully an offer for sale by existing investors, where fresh funds are raised for purposes besides capital expenditure.


Representational image (Image credit: Hindu Business Line)


In addition to this, the eligibility criteria with reference to the average market capitalization of public shareholding of the issuer was relaxed to Rs 100 crore from the previous Rs 250 crore. The shareholding period for investors owning 25 percent in startups before listing was reduced to one year from two years.


Though these measures made it easier and encouraged companies and startups to get listed on the stock exchange, they seem to have played a small role in the IPO rush of 2020-21.

“The relaxation of norms by SEBI has played only a minor role in the IPO wave we are witnessing in India. The most appropriate time for companies to introduce new or fresh capital is when the stock market booms. So, they are leveraging exactly that,” notes Jayesh Doshi, Managing Director, Manifest Invest Private Ltd.

Why are companies going public and how will it help them?

Several companies incurred losses when the first and second wave of coronavirus struck the country. The lockdowns imposed by the states blew up the expenses, with hardly any income to bear the cost. The Confederation of All India Traders (CAIT) said that the loss approximately amounted to Rs 15 lakh crore in April and May, 2021.


While some firms were filing for an IPO to get back on track, others wanted to pool in money for expansion, fund capital expenditure or meet growing demands.


For instance, Indigo Paints, one of the fastest-growing paint companies in India in terms of revenue, applied for an IPO in January this year to meet capital expenses at its manufacturing facility in Pudukkottai, Tamil Nadu, and also repay certain borrowings. Zomato decided to go public with an objective to fund its organic and inorganic growth initiatives and for general corporate purposes. On the other hand, Clean Science and Technology Ltd was mainly driven by the share listing benefits on the BSE and NSE.


“If the company has the right business strategy and model in place, and uses the capital effectively, it can do wonders. However, the impact and result of this can be seen only in the long run,” says Doshi.


Albeit, there are a slew of other advantages organisations can bank on to change the course of its growth once listed on the exchanges. Not only does it obtain more value for securities, but enables it to capture better opportunities to raise capital in future. Additionally, its credibility and visibility is enhanced in the eyes of the public. Needless to say, if the capital obtained through IPOs is deployed efficiently, the organisation could scale great heights.


Charting the course

It is going to be raining IPOs in the next few months too. From Star Health Insurance, Freshworks, Mobikwik, Policybazaar, Pinelabs to Shriram Properties, there is a beeline of firms that are gearing up to sell their shares on the stock exchange.


The digital payments forerunner Paytm has also filed a draft prospectus with the capital markets regulator to raise Rs 16,600 crore. And, this is deemed to be the nation’s biggest public issue, surpassing that of Coal India, which had raised Rs 15,000 crore in October 2010.


But, how long is the bullish streak going to continue?


Doshi notes, “Since the festive season is about to start, there is still a lot of optimism in the market. However, we need to remember that markets generally run ahead of time and are cyclical in nature.”


He also puts in a word of caution for all the young and fervent investors.


“It is important to not get carried away amidst the bull rally and all the buzz associated with it. Understanding the fundamentals such as the financials of the company, background of the promoters and management, business model and even the price being paid for the IPO is very important. Investing is like playing a test match. In the end, it takes discipline and practice to win.”

 

Edited by Aparna Chandrashekhar

Cover image illustration by Jyothi Syam

 

Some video resources to help you learn more on the IPO boom of 2020-21: