Why India's red-hot IPO market has worried market regulator SEBI

A small bike dealer from India’s capital, Delhi, suddenly came into the limelight last month. The firm listed its shares in India’s red-hot stock market. During its initial public offering (IPO), it had invited bids to raise just Rs 12 crore, but it received bids worth over Rs 4,800 crore. It seemed like thousands of stock market investors eagerly wanted to invest in the firm. What surprised market analysts most was that the company has just two bike showrooms in Delhi and employs only eight workers.

This is not a one-off example. India’s booming stock market has thrown up many such surprises. According to an EY report, in the first six months of 2024, stock markets around the globe saw 551 IPOs. India accounted for about 152 public offerings, making up 27 per cent of all IPOs globally. In comparison, the whole of North and South America saw just 86 IPOs. Analysts say a large number of small investors looking for high returns and small corporations hoping to benefit have created a frenzy.

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Just last week, one of India’s largest home loan providers, Bajaj Housing Finance, made its stock market debut. The firm’s stock price more than doubled in just a few hours of listing. This stock market fever in India is expected to continue, with big names like Hyundai Motors and LG Electronics reportedly planning to list their Indian units. Meanwhile, startups like Swiggy and Ather are also planning IPOs this year.

As Indian small investors put their hard-earned money into these IPOs, hoping for exuberant returns, let’s try to understand what’s driving the buzzing IPO market and what risks lie ahead.

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India’s Buzzing IPO Market

According to Bloomberg, the Indian stock market, which combines India’s two main stock exchanges, BSE and NSE, has seen about 240 IPOs this year so far. These public offerings have raised over $8.6 billion for companies. Many more IPOs are lined up. Compare this with 2023, when there were 234 IPOs, which raised about $7.9 billion.

In the past couple of years, a large number of small and medium companies have raised money through IPOs. Their stock market listing is different from regular IPOs. It is called Small and Medium Enterprise Initial Public Offerings (SME IPOs). They are differentiated in terms of their net worth, profits, and other metrics.

The process and timeline for an SME IPO are shorter compared to a mainboard IPO, and these IPOs are cleared directly by stock exchanges without the involvement of India’s market regulator, SEBI.

“Since SMEs play such an important role in the economy in terms of their contribution to GDP, employment generation, and foreign exchange earnings, the general thinking is that SMEs should be encouraged and not denied access to the capital market,” said Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

“As a result, stock exchanges approve these SMEs, and SEBI is not involved. This means IPOs are conducted without due diligence or strict, rigorous standards. Consequently, many doubtful companies and SMEs are gaining approval and being listed” added Dr. Vijayakumar.

Data from Chittorgarh.com shows that before the pandemic in 2019, there were just 54 small or medium-sized firms that applied for IPOs. In 2023, a record 182 small firms listed their stock. And in the first eight months of 2024, there have already been 186 SME IPOs. Many of these firms say they use the IPO money to either pay off old debt or cover daily expenses.

Key Factors Driving the IPOs

According to most stock market experts, the key driver behind the Indian IPO surge and stock market boom is the country’s growth potential. A recent report by KPMG said that while the global economy narrowly avoided a recession in 2023, India showcased its economic prowess and diplomatic finesse. India has seen over a 7 per cent economic growth rate in the last three consecutive financial years, and this has been reflected in the performance of the Indian equity market.

Between April 2023 and March 2024, barring the US and Japan, most top stock markets had less than 15 per cent gains. Meanwhile, both Indian stock market indices, Sensex and Nifty, surged over 25 per cent.

According to Dr. Vijayakumar, there is a positive correlation between the IPO market and the secondary market. If you look at historical experience, whenever the secondary market is bullish, the IPO market also becomes very vibrant, with strong subscription levels. Many oversubscriptions are possible.

Another key factor behind India’s stock market boom is the exponential rise of small, individual investors, known as retail investors. According to the Indian government’s Economic Survey 2023-24, retail investors now make up nearly 36 per cent of stock market trading. Their participation is evident by the surge in Demat accounts, which are used for holding stocks. There were 115 million Demat accounts in April 2023, and in just 12 months, this number rose to 154 million.

However, this rise in retail investors has also raised concerns among experts.

According to Uday Patil, Executive Director of PL Capital Markets, the response and appetite from retail investors are very high, with 35 per cent of IPOs reserved for them. While this makes their role significant, the market has seen a large number of retail investors entering the IPO market with little understanding of the stock market.

SEBI, the market regulator, also flagged these risks in a report earlier this month. It showed that more than half of investors in IPOs sell their shares within a week of listing, which leads to stock price declines in subsequent trading sessions.

SEBI also pointed to the possibility of manipulation, where scammers apply for multiple lots of a company’s shares, creating an illusion of high demand and making other investors think that the firm’s shares are in high demand.

To address this concern, SEBI reportedly plans to tighten norms for SME IPOs and bring these IPOs under the same level of scrutiny as mainboard firms to protect retail investors.