Has the IPO dream run ended in India?

The past year was a record in many ways for companies listing for the first time on Indian bourses. Indian firms raised Rs 26,493.84 crore through initial public offers (IPOs) in 2016, making it one of the best years for IPOs on record. The average amount raised in 2016’s IPOs is over Rs1,000 crore, the highest on record.

While the average size of large companies’ initial public offers or IPOs was the highest on record in 2016; small and medium enterprises ended up raising more money than ever before. Small and medium enterprises (SMEs) raised a total of Rs537.27 crore through 67 issues. Those with a paid-up capital of less than Rs.25 crore are allowed to list on a distinct board meant for smaller companies. This is separate from the exchanges’ main board. The 2016 SME IPO mop-up is more than 60% higher than the previous best of Rs335.17 raised in 2013.

Buoyed by faster regulatory clearances, and a supportive market, a sizeable number of big and small firms debuted on the bourses over the past year. The number of days taken to list has fallen sharply over the years. It took the median issue around two months to list in 1999 after it opened for public subscription. This has fallen to less than two weeks in 2016.

Despite the stellar rise of the IPO market over the past year, the outlook for 2017 remains clouded, primarily because of uncertainties regarding foreign portfolio investment inflows. Foreign portfolio investors have been net sellers, selling shares worth Rs31,221.84 crore in the December quarter. This makes it the worst quarter on record for foreign portfolio flows since March 1993.

A 16 December report by Kotak Institutional Equities noted that the outlook for foreign flows has weakened because of the impact of earnings downgrades following demonetisation, and because of headwinds for the information technology and pharmaceutical sectors.

The lacklustre performance of most newly listed firms in India may also dampen sentiment. The S&P BSE IPO index (which measures the performance of newly listed firms) trailed the BSE Sensex in 2016, after posting higher relative returns in 2014 and 2015. As the chart shows, apart from that brief phase of outperformance, the BSE IPO index has tended to trail both the Sensex and the broader market since it was launched.

A weak IPO market could weigh on private investments in the coming months, and slow the divestment plans of the government. It is worth noting that the revival in the IPO market last year has not aided a capex recovery significantly as companies have received a smaller share of the capital raised through IPOs over the past year compared to the past. Existing investors who found an exit option in the IPOs accounted for nearly two-thirds of the funds raised through IPOs over the past year. Only a little over a third (Rs9175.89 crore) of the capital raised through IPOs went to companies that issued fresh shares to raise such funds.

Unlike in the last IPO boom of 2007-08, when money was raised through public issues largely for fresh investments and expansion of businesses, the bulk of the increase in capital raised through the primary market went to investors who made an exit from investments made earlier in the companies that listed on the bourses.

While 2016 saw the third-highest volume of funds raised through IPOs over the past quarter century, in terms of the proportion of fresh capital raised, it ranks among the bottom rungs. If the buoyancy in the IPO market continues this year, that trend may well reverse, and the primary markets could once again become a major driver of fresh investments in the Indian economy. But the chances of that happening appear quite slim this year.


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