Some relevant information concerning initial public offers (IPOs) has been recently made available by SEBI. This information enables investors to have a well-informed application of IPOs, which increases the possibility of them being allotted shares and knowing how much profit can be made out of listing gains. In this blog, we lay out the explaining the data, how you should make an IPO application to the best chances for getting allotted, and how to exit for maximum returns.
IPO Trends for the Period 2019 to 2024
The data received from SEBI consists of the IPO timeline from 2019 to 2024 and has indicated that the IPO market was on boom, post COVID-19. For example, in the year January to December 2022, an amount of ?1,11,000 crore was raised from 50 IPOs. The information regarding the year 2023 shows mild contraction while the year 2024 financial year has raised amounts of ?48,000 crore from 55 IPOs which have already taken place. This further proves that IPO’s are still coming up thick and fast.
From the data, it can also be inferred that between the years 2021 and 2023, 144 IPOs were made avaialbe to the public. 108 of these IPOs were able to record a positive return, from which 26 of them had over 50% return on the first day of quotation.
Which is the most revealing regarding the quality of data?
One of the biggest takeaways from SEBI’s data is how IPO allotment works, especially for retail investors. There are approximately 2.85 crore total investor accounts and approximately 20 million unique investors who have opened new Demat accounts in the last 3 years. An exciting observation is that – the new Demat accounts which were opened for IPO applications post the COVID-19 era seem to have benefitted a lot as they are more likely to get IPO shares than the old accounts./p>
This raises an important question: Why do new Demat accounts have better chances? The data does not answer this question directly, but it shows that this situation appears to be a greater degree than the percentage of more successful final attempts to purchase shares of the offered stock for recently opened accounts. For example, if you wonder why your old account never gets IPO allotments, and your relative’s new account does, this may be the reason.
On average, it is estimated by data points obtained from SEBI that one in three shares allotted on an IPO to a retail investor, does not get utilized by the investor. But there also were approximately 92 IPOs with such a level of demand that their subscription rates exceeded the offered volume of shares by more than 10 times, and there were really none for inflating the demands.
Who Is Making the Money?
The exit pattern that emerges from the IPO, however, does provide some interesting views. According to the data presented by SEBI, most retail investors close their positions within a week from the listing day (LD). While approximately 50% of retail investors prefer to get rid of their total or partial holding of their shares in the first week, institutions such as banks and other lending institutions hold longer, exiting at approximately 80% mark.
This one’s easy. Profiteering in stocks takes a time paradigm – savvy retail clients do not wait for long to take their profits whereas most other stock purchasers are usually buying high which is a misfortune of “Whenever I have missed out’ (FOMO) factors. Therefore, they always get certain shares at much higher share prices and lose listing gains.
To cite a recent IPO in the case of Ola, in listing, many investors rushed in in the known market price and post flattering stock prices only for the stock to drop afterwards. The principle is transparent kids. The ones who are wiser in the market jump out early are those who profit from the market. Those who run after the stock post listing normally find themselves in a higher average price situation.
How Much Can You Gain from Listing Day?
Further, another important piece of information that was communicated by SEBI was on listing gains.
When there is an oversubscription of an IPO by a factor of 100 or more, an average of 10x listing gains has been recorded. For example, 22 such companies with a high oversubscription witnessed exceptional listing gains, where the average was around 10x on the first day itself.
This explains quite well that though there are cases of windfall profits, one has to be practical. A loss of 20-22% is realized by most IPOs on their first listing day. If you are in a hurry to realize profits, better strike off at this juncture instead of waiting and hoping for better returns.
The Impact of SEBI and RBI Regulations
Regulatory action is the other factor that has transformed the IPO market in India. In April 2022, the Reserve Bank of India put a limit on NBFC funding for IPO application, which curbed the number of investors who were applying with borrowed money. Prior to this, most investors would borrow money, go for an IPO and within a few hours sell the shares they had bought and make money. With this option gone, the volume of IPOs has reduced.
SEBI has again turned this system upside down by altering the allocation of shares for non-institutional investors (NII) changing it to lottery rather than piecemeal affordable ownership.
Key Takeaways
So, what can we learn from all this data? Here are the key takeaways for retail investors:
- New Demat Accounts Have an Advantage: New Demat accounts increase your chances of getting an IPO allotment compared to older demat account holders.
- Exit Quickly for Listing Gains: Most retail investors and bankers exit within a week, especially on the listing day. To maximize your gains: never chase so long. Sell early if that is what it takes.
- Avoid FOMO:Avoid the mistake of buying shares after the IPO is listed, and when prices have escalated. This often leads to losses.
- Understand the Market: Good listing gains are always made on IPOs with many subscription lots, but one should not expect every IPO to be in this category. Being realistic with your profit expectations would also help a great deal.
These insights together with SEBI’s data can increase one’s chances for an IPO allotment and enhance better investment decisions.
