What is an Initial Public Offerings (IPO)?
An IPO, or an Initial Public Offerings, is a process that allows a private company to sell its shares to the public for the first time. By doing so, the company can raise funds from investors and expand its business. An IPO also gives the company more visibility and credibility in the market. The company has to follow certain regulations and disclosures before and after the IPO. The price of the shares is determined by the demand and supply of the market and the valuation of the company. Some of the top wealth management firms provides a required professional knowledge about initial public offerings (IPO).
History of initial public offerings (IPO) in India
The concept of initial public offering (IPO) is not new in India. The first company that issued its shares to the public for the first time in the country was The Dutch East India Company. It made an IPO in the year 1602 to raise its equity capital from the public. Also, it was the first company which issued bond and shares to the public.
Since then, many companies have followed the IPO route to raise funds from the market and expand their businesses. IPOs are regulated by the Securities and Exchange Board of India (SEBI), which issues guidelines and rules for the issuers, intermediaries and investors involved in the process.
IPOs have several advantages and disadvantages for both the companies and the investors.
Advantages of initial public offerings (IPO)
- IPOs enable companies to access a large pool of capital from a wide range of investors.
- IPOs increase the visibility and credibility of the companies in the market and among the stakeholders.
- IPOs provide an exit option for the existing shareholders, promoters and venture capitalists who want to monetize their investments.
- IPOs create a public market for the shares of the companies, which facilitates trading, liquidity and price discovery.
Disadvantages of initial public offerings (IPO)
- IPOs involve a lot of time, cost and compliance requirements for the companies, which may divert their attention from their core business activities.
- IPOs expose the companies to greater scrutiny and regulation by the authorities and the public.
- IPOs may dilute the control and ownership of the existing shareholders and promoters over the companies.
- IPOs may create unrealistic expectations and pressure on the companies to perform well and deliver returns to the investors.
IPOs are an important source of capital formation and economic growth in India. They also offer an opportunity for investors to participate in the growth story of various sectors and industries. However, IPOs also entail certain risks and challenges, which require careful analysis and due diligence by both the issuers and the investors before making any decision.
The year 2021 was a blockbuster year for IPOs in India, with 110 deals raising $16.94 billion, according to a report by EY. This was a 156% increase in numbers and a 314% increase in proceeds compared to 2020, making it the best IPO year in India in the last 20 years. The IPO market was driven by strong investor appetite, favourable market conditions, regulatory reforms and a diverse mix of sectors and companies.
Some of the notable IPOs of 2021 were Zomato, Paytm, Nykaa, Policybazaar, Nuvoco Vistas, CarTrade Tech, Glenmark Life Sciences and Tatva Chintan Pharma Chem. These IPOs attracted huge oversubscription and listing gains, reflecting the high demand and confidence in the Indian startup ecosystem. The average deal size of IPOs in 2021 was $154 million, up from $95 million in 2020.
However, the IPO performance in 2022 has been more erratic and subdued so far, with only half of the money raised compared to 2021. The IPO market has faced some headwinds such as rising interest rates, inflation concerns, regulatory uncertainties, and valuation issues. Some of the IPOs that failed to impress the investors were Anand Rathi Wealth, Supriya Lifescience, Shriram Properties and Star Health and Allied Insurance. These IPOs traded below their issue price on listing day and have not recovered much since then.
The outlook for the IPO market in India remains positive, as there are many companies that are planning to go public in 2022. Some of the expected IPOs are Ola, Oyo, Delhivery, Byju’s, Flipkart, Grofers, PhonePe and Udaan. These companies have strong business models, large customer base and high growth potential. They are also backed by marquee investors and have achieved unicorn status.
The IPO market in India is expected to witness more innovation and diversity in terms of sectors, business models and deal structures. The introduction of new concepts such as SPACs (special purpose acquisition companies), pre-IPO funding, anchor investors and green shoe options are likely to enhance the attractiveness and efficiency of the IPO market. The regulatory environment is also supportive of the IPO market, as SEBI has introduced various reforms such as reducing the minimum application size, allowing differential voting rights and relaxing profitability criteria.
The IPO market in India is a reflection of the economic growth and entrepreneurial spirit of the country. It offers an opportunity for companies to raise capital, create wealth and enhance their visibility. It also offers an opportunity for investors to participate in the growth story of these companies and diversify their portfolio. The IPO market in India is expected to remain vibrant and dynamic in the coming years, as more companies aspire to go public, and more investors seek to invest in them.
Some of the factors that contribute to the attractiveness of the IPO market in India are:
- The strong performance of the Indian economy, which is projected to grow at over 7% annually in the next five years, according to the IMF.
- The favorable demographics of India, which has a large and young population, a rising middle class, and a high consumer demand.
- The supportive policies and regulations of the government, which aim to promote ease of doing business, innovation, digitization, and financial inclusion.
- The increasing participation of retail investors, who are becoming more aware and savvy about the benefits of investing in equities.
- The emergence of new sectors and business models, such as e-commerce, fintech, edtech, healthtech, biotech, etc., which are disrupting the traditional industries and creating new opportunities for growth.
According to a report by EY India, the IPO market in India raised a record Rs 1.77 lakh crore (US$ 24 billion) in 2021, surpassing the previous high of Rs 1.6 lakh crore (US$ 21.5 billion) in 2017. The year 2021 witnessed 76 IPOs across mainline and SME segments, with an average deal size of Rs 2,330 crore (US$ 314 million). Some of the notable IPOs of 2021 were Zomato, Paytm, Nykaa, Policybazaar, Nuvoco Vistas, CarTrade Tech, Glenmark Life Sciences, etc.
The year 2023 is expected to see more IPO activity, as many companies are gearing up to tap the market. Some of the companies that are likely to launch their IPOs in 2023 are Flipkart, Ola, Oyo, Byju’s, Delhivery, MobiKwik, Jupiter Hospital, IndiaFirst Life Insurance, etc. The IPO market in India is also expected to witness more participation from foreign investors, who are attracted by the growth potential and valuation of Indian companies.
The IPO market in India is a lucrative avenue for both companies and investors to create value and wealth. However, it also entails certain risks and challenges, such as market volatility, regulatory uncertainties, valuation issues, post-listing performance, etc. Therefore, it is advisable for both companies and investors to do their due diligence and research before entering the IPO market.