The IPO frenzy currently gripping the Indian markets, while exciting, often has not translated into the kind of returns that investors anticipated.

A closer look at some of the largest IPOs in recent years, including Life Insurance Corporation (LIC), Paytm (One 97 Communications), Vodafone Idea, Reliance Power, and Yes Bank, shows that the hype surrounding their listings hasn’t always been justified by their performance.

Frenzy Around Big IPOs, A Reality Check

India’s IPO market has been on fire, with companies across sectors rushing to go public.

The excitement surrounding these public offerings is noticeable, as investors—retail and institutional alike—clamour for a piece of what they hope will be lucrative, high-growth opportunities.

However, an analysis of the top five IPOs by size reveals that the post-listing returns are often far from spectacular.

Case Study: Top 5 IPOs and Their One-Year Returns

1) LIC’s Rs 21,000-crore IPO: India’s largest IPO was subscribed three times but listed at an 8.6% discount. One year later, LIC’s stock recorded a 34.8% loss, leaving investors disillusioned.

2) Paytm’s Rs 18,300-crore IPO: The much-hyped fintech giant was also listed at a discount (9.3%), but its stock shed a staggering 72% within a year of its listing, making it one of the most disappointing IPOs in recent memory.

3) Vodafone Idea’s Rs 18,000-crore follow-on public offer (FPO): Listed at a premium of 7.3%, Vodafone Idea provided a modest 13.5% return till date, though its one-year return is yet to be fully realized.

4) Coal India’s Rs 15,200-crore IPO: Initially promising with an 18.8% premium at listing, Coal India’s one-year returns were only 12.2%, much lower than expected.

5) Yes Bank’s Rs 15,000-crore FPO: Despite listing at a premium of 2.5%, Yes Bank provided only 6.1% returns over one year, which left many investors underwhelmed.

The Disconnect Between Hype and Reality

The performance of these marquee IPOs shows a recurring theme —despite the fanfare and high expectations, many of these companies have failed to deliver on the promise of significant wealth creation in their first year.

For instance, LIC’s much-anticipated listing provided a mere 19.3% return in absolute terms and a compounded annual growth rate (CAGR) of 9.2% since its debut in May 2022.

Similarly, Paytm has lost 66.3% in absolute terms and its CAGR stands at a disappointing -30.4% since its listing in November 2021.

What’s Fueling the Frenzy?

Hence, despite this data what is fuelling the IPO frenzy?

The answer is that several factors are contributing to this IPO frenzy,

1) Retail Investor Hype: A surge in retail investor participation, fueled by easy access to trading platforms, has created a wave of speculative interest. Many retail investors are drawn by the possibility of quick listing gains, sometimes ignoring the fundamentals of the business.

2) Media and Marketing: High-profile IPOs often generate media buzz, which amplifies the hype and creates a sense of urgency among investors to get in on the action, even though the long-term performance may not justify the valuation.

3) Global Liquidity: An environment of easy money and global liquidity has driven up the demand for equities, pushing valuations higher and creating a ‘fear of missing out’ (FOMO) among investors.

Lessons for Investors

While IPOs can offer exciting opportunities, the underwhelming returns from several large IPOs emphasise the importance of focusing on fundamentals rather than hype.

Investors must be cautious of overvaluation and avoid being swept up by market frenzy. Historical data shows that many of the biggest IPOs in India have failed to meet expectations in their first year, often leaving investors with disappointing returns.

This ongoing IPO frenzy, while reflective of India’s growth potential and vibrant capital markets, also is a warning that not all that glitters on listing day turns into gold.

Therefore, investors must tread carefully, balancing excitement with due diligence and a focus on long-term value creation.

September Set to Be Busiest Month in 14 Years for IPOs, Says RBI

Despite the underwhelming returns of some of the biggest IPOs, India’s primary market is experiencing remarkable activity, with the RBI indicating that September is set to be the busiest month for initial public offerings (IPOs) in the last 14 years.

This surge spans both the mainboard and SME segments, with strong interest from domestic mutual funds and significant oversubscriptions, as noted in the RBI’s latest bulletin released a few days ago.

“September is set to break records, with over 28 companies entering the IPO market, making it the busiest month for IPOs—both mainboard and SME—since 2009,” the bulletin stated.

It further accentuated that India is leading globally in terms of the number of IPOs this year, accounting for 27% of global IPO volume in the first half of 2024, particularly driven by public offerings from small and medium enterprises (SMEs). In terms of funds raised, India accounted for 9% of global IPO proceeds.

One standout example of this boom is the recent IPO of Bajaj Housing Finance Ltd., which received bids exceeding Rs 3 lakh crore, reflecting the massive demand for such public offerings.

Regulatory Shifts Drive Oversubscription Control

The RBI bulletin also pointed out that regulatory reforms, such as capping IPO funding by non-banking financial companies (NBFCs) and moving from proportional allotment to a lottery-based method, have successfully reduced the massive oversubscriptions that used to occur in mainboard IPOs.

“In the SME segment, however, the persistence of the proportionality-based allotment method explains the extraordinary oversubscription rates,” the RBI added.

Market regulator SEBI is expected to release a consultation paper soon addressing concerns around the SME IPO listing process, which currently lacks stringent checks and balances. This move follows growing concerns over potential price manipulation and listing irregularities in the SME market.

UPI Mandates Triple in IPOs

The adoption of UPI for IPO applications has also seen a massive surge. According to the RBI, the creation of UPI mandates for IPOs nearly tripled, with the rate of successful mandate executions reaching 100% in August 2024, up from 98% in the previous year.

Retail Investors Sustain the SME IPO Boom

In particular, SME IPOs have seen overwhelming demand, with many companies experiencing oversubscriptions reaching into the hundreds or even thousands of times.

This has been driven largely by retail investors, who are pouring into the SME segment despite the relatively high entry barrier of Rs 1 lakh minimum investment.

Established in 2012, this threshold was designed to keep small investors away from the inherently risky SME market, but industry experts now argue that the figure needs to be revised upwards, given inflationary factors.

Pranav Haldea, Managing Director of Prime Database Group, suggested, “The minimum ticket size should be increased to Rs 2 lakh or more to align with inflation and protect investors from the high risk associated with these smaller companies.”

Despite the impressive subscription rates, many SME IPOs see their stock prices drop significantly shortly after listing.

For example, while HOAC Foods’ IPO was oversubscribed 1,834 times and Magenta Lifecare’s offering 932 times, their stock prices fell shortly after debuting on the market.

This trend raises questions about market manipulation and the sustainability of these IPOs post-listing, particularly due to the low liquidity typically seen in SME stocks.

As SME IPOs continue to dominate, the focus on regulatory oversight and investor protection is becoming increasingly important to ensure the long-term health and integrity of India’s dynamic IPO market.

Some market experts have raised concerns that promoters and brokers, along with their networks, are artificially inflating subscription numbers to create an IPO frenzy.

This tactic leads to high initial oversubscription, drawing in retail investors eager to capitalize on the hype. Once these IPOs are successfully listed, the stocks are often sold off to the same retail investors who bought during the rush.

Regulators are now scrutinizing the profiles of investors and the post-listing performance of these IPOs to address these potential issues, explained Pranav Haldea, Managing Director of Prime Database Group.

Another key factor driving the surge in SME IPOs is the current abundance of liquidity in the market. During periods of ample liquidity, investors are more willing to commit capital, creating an ideal environment for companies seeking to go public.

“SMEs are naturally keen to capitalize on this market liquidity, both from retail and high-net-worth individuals (HNIs), to raise funds with minimal promoter dilution,” said Mataprasad Pandey, Vice President at Arete Capital Services Pvt.

He added that the ongoing bull run has amplified this trend, as both mainstream and SME IPOs benefit from the influx of available capital, offering a prime opportunity for SMEs to launch successful IPOs.

In periods of high market valuations, companies can price their IPOs more favorably, allowing them to dilute less of their equity while still achieving higher valuations. This scenario is particularly advantageous for SMEs, as it enables promoters to raise capital while retaining a larger ownership stake, Pandey explained.

Similarly, with interest rates at their peak, debt financing has become increasingly expensive for SMEs. High borrowing costs can strain debt-to-equity ratios, making equity fundraising through IPOs a more attractive option.

This shift helps SMEs better manage their financials while taking advantage of favorable market conditions to raise capital.

The Last Bit, While IPOs provide exciting investment opportunities, they come with inherent risks.

Some companies with strong initial hype may struggle post-listing, either because of overvaluation or unrealistic growth expectations. Therefore, investors should be cautious about herd mentality and evaluate each company’s fundamentals.

Despite the IPO boom, market experts also warn of a possible correction, as any significant shift in global economic conditions, interest rates, or inflation could dampen market sentiment.

Hence, the IPO frenzy in India could be taken as a barometer for the country’s economic potential and the growing role of capital markets in fueling corporate growth and while it’s a sign of India’s evolving financial markets, it also sets the stage for investors to balance excitement with caution in a highly dynamic market.