Revisiting IPO Trends in India: Oversubscription Frenzies & Underwhelming Market Debuts
Introduction
Indian IPO market has been very busy and broken in the recent years. It has reflected the growing investor interest and strong corporate desire to raise capital. However, this has raised a post listing concern since various IPO could not sustain the market and gain the momentum on the day of listing despite being oversubscribed. On the other hand, some delivered expected return. There is factor involved here which are overvaluation, current market dynamics and unexpected alignment between companies’ expectation and investors. As of 2024, Companies such as Hyundai Motor India ltd, Zomato, LIC and Paytm, Bajaj Housing finance and Nykaa have grabbed the investors’ attention with the oversubscription such that Hyundai motor India was subscribed by 2.37 times. With these staggering number of subscriptions, the optimism for retail, institutional and foreign investor in the market have increased. Therefore, the oversubscription frenzy and the underwhelming performance of Initial Public Offering (IPO) by the companies emphasizes the need to understand the market dynamics.
Retail and Institutional investor In IPO Market
The oversubscription of IPO means when the demand does not meet the supply, that is when the investor has the immense interest and confidence in buying a unit and this happens due to factor such as media and marketing strategy, investor confidence and institutional backing.
With the participation of retail investor, and the advent of user-friendly trading platforms, the growing financial literacy among India’s population, retail participation in equity market has seen a sharp increase. IPOs are often perceived as quick wealth-generation opportunities, enticing small investors to invest, even without a deep analysis of a company’s fundamental. The investors are drawn to the relatively low entry barrier in IPO applications, as they can participate with small unit sizes. Many people also believe in the listing gains narrative, where IPO shares tend to open at a premium on the debut day, delivering an immediate return. This speculation, fueled by anecdotes of large profits made by early investors, amplifies retail demand, leading to significant oversubscription in this category.
Institutional investor pool large amount of money and they represent a large stakeholder in the company. They can dictate the IPO process and mark a significant growth and loss of a company making a debut in IPO process. They develop a trust by a bringing a large sum of money to the company making a strong confidence in the company as well as the other investor, since their investment can make an IPO successful.
They also influence price of an IPO at the stage of book building process. Through the submission of substantial bids informed by their analyses and valuation models, these investors contribute to the establishment of an equitable price range for the IPO shares. Elevated bid volumes from institutional participants are indicative of robust demand, enabling issuing companies to justify a higher initial pricing strategy while carefully navigating the competing priorities of the company, underwriters, and the broader investor base.
Trend in the Market Debut[1]
In fiscal year 2024, India saw 76 mainboard IPOs, the most since fiscal year 2017. This represents a substantial 111% increase from the 36 listings in fiscal year 2023 and a significant 62% rise from the 47 listings in fiscal year 2022.
The final quarter of fiscal year 2024 saw 21 mainboard IPOs, a notable jump from just 2 in the same period of fiscal year 2023. Average listing gains in fiscal year 2024 were 29%, in contrast to the average 12% returns in fiscal year 2023 and average 25% gains in fiscal year 2022.
Oversubscription in fiscal year 2024 reached 50 times the available IPOs, while fiscal year 2023 saw an average oversubscription of 15 times, and fiscal year 2022 saw an average of 52 times. Fiscal year 2024 witnessed a remarkable subscription of INR 23,133 billion against the funds raised of INR 619 billion.
Retail investor participation surged in fiscal year 2024, leading to an average retail oversubscription of 30 times, significantly exceeding fiscal year 2023’s 7 times and even fiscal year 2022’s 14 times.
The Qualified Institutional Buyers (QIB) category experienced an average oversubscription rate of 81 times in fiscal year 2024. This was a significant increase from the 31 times oversubscription in fiscal year 2023 and a decrease from the 57 times oversubscription in fiscal year 2022.
Fiscal year (FY) 2024 saw a substantial increase in mainboard IPOs, registering 76 listings, the highest since FY17. This signifies a significant 111% increase compared to the 36 listings in FY23 and a considerable 62% rise from the 47 listings in FY22.
These 76 IPOs attracted an impressive oversubscription rate of 50 times, contrasting with the 15 times oversubscription in FY23 and 52 times in FY22. Notably, FY24 witnessed a remarkable INR 23,133 billion subscription against a total raised fund of INR 619 billion. The average listing gain in FY24 stood at 29%, a considerable improvement over the average 12% returns in FY23 and comparable to the average 25% gains witnessed in FY22.
Category-wise bid details reveal distinct trends:
The Qualified Institutional Buyers (QIB) category experienced an average oversubscription rate of 81 times in FY24, a surge from the 31 times recorded in FY23 but lower than the 57 times observed in FY22. The number of listings subscribed to more than 100 times by QIBs surged to 31 in FY24, contrasting sharply with only 2 in FY23 and 6 in FY22.
Retail investor participation in FY24 was particularly remarkable, with the average retail oversubscription reaching 30 times, significantly exceeding the 7 times in FY23 and the 14 times in FY22. The highest oversubscription from the retail category in FY24 was an astounding 375 times for a company in the industrial sector.
Overall, FY24 witnessed robust IPO activity, marked by impressive oversubscription rates from both QIBs and retail investors, resulting in significant listing gain.
Contributing Factors to Poor Performance
High Valuations at IPO: As per the trend, the strong investor demand and a positive economic outlook contributed to a surge in IPO activity. This environment can sometimes lead to companies going public at inflated valuations, driven by optimistic growth projections. If these projections fail to materialize, the stock price may decline post-listing.
Profitability Concerns in New Age Companies: With the influx of new-age companies listing in India, people are evaluating redomiciling their holding companies to India from overseas jurisdictions. This suggests that some of these companies may not yet be profitable or have limited operating history in India, potentially impacting investors confidence and stock performance after listing.
Market Volatility and Global Uncertainty: The sources emphasize that rising interest rates, geopolitical tensions, and global economic slowdown have negatively impacted the investment landscape. These factors contribute to market volatility, potentially leading to stock price declines even for fundamentally sound companies.
Investor Sentiment and Risk Aversion: Despite a generally positive outlook, the sources mention that foreign institutional investors (FIIs) withdrew significant funds from the Indian equity market in January 2024, citing concerns about earnings relative to valuations. This shift in investor sentiment and increased risk aversion can impact the performance of recent IPOs, especially those with high valuation
Case Study
LIC IPO
The IPO was set to be listed on 17th may 2022 with a valuation of around 6.07 lakh crore with a maximum share size of 15 share. The government fixed the price at 949 apiece at the upper band to fetch around 20 thousand crores from the market. The IPO was subscribed at 2.45 times. The current market share of LIC is highest in the insurance sector. It currently commands over 64% of the total market share in the insurance industry. However, it is worth noting that it once enjoyed a monopoly in the sector. Now, with the entry of new private players introducing innovative ideas and appealing policies, LIC is gradually losing its dominance and market share. Moreover, LIC has always been injecting cash flows and it has been highly regarded as supporter of government and has highest cash reserve. Due to this government action, there has been a noticeable negative impact on LIC’s financial performance. Notably, LIC’s NPAs are the highest among its peers, which has emerged as a significant weakness for the organization.
When the IPO got listed, it gave a negative return and further investor started withdrawing their money from the market. LIC’s shares were issued at a price of ₹949 but were listed at ₹872 on the National Stock Exchange of India. The average decrease in LIC’s share price during trading sessions has been estimated at approximately 1.3%.[2]
Hyundai IPO
The automobile manufacturer is a second largest passenger maker vehicle with a market share of 15% in FY24. This stronghold likely contributed to the enthusiasm among large investors who focus on market dominance. It was oversubscribed nearly seven times, highlighting confidence in Hyundai’s long-term market potential and dominance in the Indian automotive sector. Institutional backing indicated trust in Hyundai’s strategic plans, including EV and capacity expansion initiatives.
However, retail investor subscribed only 50% of the portion, reflecting concerns about the IPO’s high valuation and structure.
At a price-to-earnings (P/E) ratio of 26.73, based on FY25 annualized earnings, the IPO was seen as overpriced, especially in a cautious market environment. Despite Hyundai Motor India’s financial growth (e.g., revenue growth from ₹41,404.65 crore in FY21 to ₹71,302.33 crore in FY24), the market considered the pricing aggressive, particularly given market uncertainties and rising competition in the EV sector. Shares listed at ₹1,934, below the upper IPO price band of ₹1,960, and dropped further during the first trading day, closing at ₹1,882.1 marking a 6% decline.
This underwhelming performance dampened investor confidence and reinforced perceptions of overvaluation.
Suggestions for enhancing the IPO framework
One of the reasons of overpricing of the IPO is the transparency in the pricing process. Since the company are allowed to valuate themselves which lead to price inflation. To strengthen the framework for IPO process and the issue of overpricing and the transparency, SEBI can mandate the valuation from SEBI approved entity for finalizing the IPO pricing. Further the report of valuation maybe made public. Moreover, a pricing benchmark can be made for different sector/industry such as P/E ratio which could help in avoiding the excessive valuation. Establishing a post-IPO price monitoring mechanism to track stock performance for a defined period would allow SEBI to investigate mispricing or market manipulation if shares trade consistently below the issue price.
Wider participation in the book-building process should be encouraged to facilitate better price discovery, and the proportion of shares sold through Offer-for-Sale (OFS) structures in IPOs could be capped to ensure that funds raised benefit the company’s growth. SEBI could also form a dedicated IPO oversight committee to review pricing methodologies and address related complaints. Restricting promoters from offloading significant holdings immediately after the IPO would ensure they remain committed to the company’s long-term performance.
Finally, enforcing accountability for valuation errors, including penalties for companies and merchant bankers in cases of significant overpricing, would promote fair pricing practices and reinforce investor trust in the IPO framework.
Conclusion
The Indian IPO market has witnessed remarkable growth and investor enthusiasm, marked by increased oversubscriptions and the entry of prominent companies like Hyundai Motor India, LIC, and Nykaa. However, this boom has also highlighted critical challenges, such as inflated valuations, transparency issues, and inconsistent post-listing performances. The oversubscription trend, driven by factors like institutional backing and retail investor optimism, underscores the market’s potential. Still, it also emphasizes the need for regulatory oversight to ensure fair valuation and sustainable growth. Poor post-listing performance, as seen in cases like LIC and Hyundai, reflects concerns about overpricing, market volatility, and profitability uncertainties. These instances reveal the necessity of aligning company expectations with market realities to maintain investor confidence. Regulatory measures such as mandating independent valuations, introducing pricing benchmarks, and establishing post-IPO performance monitoring can address these concerns.
[1] KPMG Assurance and Consulting Services LLP, IPOs in India: IPO Performance and Capital Market Highlights – FY24 (July 2024), available at https://assets.kpmg.com/content/dam/kpmgsites/in/pdf/2024/07/ipos-in-india-fy24.pdf.coredownload.inline.pdf.
[2] Dr. Baneswar Kapasi & Sapana Shaw, A Study on the Motion of IPO of Life Insurance Corporation of India in the Light of SWOT Analysis, 12 Bus. Spectrum 1, 1–9 (2022), available at https://admin.iaasouthbengalbranch.org/journal/27_Article5.pdf.
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