India is experiencing a surge in initial public offerings (IPOs). In 2021, the Indian market saw year-on-year growth of 156 percent in IPO activity, as per an Ernst & Young report. This trend has carried into 2022 with the recent LIC IPO seeing record applications. The IPO boom is happening at the same time as a slew of aggressive, youthful first-time investors flood the market. But can we expect further growth or will the end result be unpleasant? Looking to the past may offer some hints.
The curious case of the 90s
There were 6,300 public issues between 1990-91 and 2021-22, which raised over Rs 8.4 lakh crore. However, more than two-thirds of the offerings were made in the first six years (1990-91 to 1995-96) alone. Out of these, the funds generated only accounted for only 4.8 percent of the total funds raised through such offers during the previous three decades. On the other hand, just 5.6 percent of the total issues given in the 30 years were raised in the last six years (between 2016-17 and 2021-22) even though they were high-value issues.
The dissolution of the Capital Controller of Issue (CCI), which had previously been in charge of establishing IPO price, was perhaps the main reason why the 90s saw a glut of issues. This is because the IPO price under the CCI regime was determined by the company’s book value rather than profits. As a result, corporations that issued initial public offerings during the CCI era frequently underpriced their offerings. If the firm in question had a track record of steady earnings growth, this worked to investors’ benefit.
The newly constituted market regulator Securities Exchange Board of India (SEBI) took over the role of CCI, giving corporations the freedom to price their offerings as they saw fit. SEBI was also tasked with reviewing the prospectuses of firms seeking to go public. 448 firms went public that year as a result of the dramatic change in the pricing law, more than triple the number that had gone public the previous year. However, that didn’t mean they were high-quality issues. With the enforcement of laws regarding prospectus and disclosures still thin on the ground, just about anyone who had a business could raise an IPO. Entrepreneurs looking for a quick buck hugely benefited from this scenario while investors always had another IPO on the horizon to make their money back if one turned out to be bust.
The bubble bursts
However, the bad news was around the corner. Towards the turn of the century, it was discovered that the vast majority of the firms that had obtained funds in the previous two or three years were fraudulent. They were termed as ‘vanishing firms,’ as the promoters vanished without a trace, leaving millions of investors with worthless paper in the form of share certificates. Following this, millions of investors left the stock market. For years, the major market for new offerings was dead, and investors even ignored mutual funds. Since the pandemic, however, India’s investor population has risen by around 15 million, after stagnating at 20 million for decades.
The present IPO scenario
A majority of the newfound investor population in India today is comprised of novice investors who have never experienced a significant market fall, let alone a lengthy bear market. The rise and fall of the market in the 90s should serve as a warning to them. The scenario today is resembling the frantic days of the mid-1990s. There are 30 issues going up for subscription every month, on average. Many of these issues are from loss-making businesses such as Zomato. However, since we commonly use their services, they appear familiar and seem like sound investment opportunities when the reality may be something else entirely.
The 1990s were characterized by phony operators pretending to be real businesses. In the 2020s, we are seeing tech start-ups, or ‘unicorns,’—companies that have billion-dollar valuations and enormous operations but no profits—looking to raise public funds and provide private equity investors an escape.
How to navigate the market
India is continuing to rise in prominence as a key emerging market for global investors. While the problems described above plague the market as does IPO underpricing, the increased distribution of information is only likely to get more investors on board. As more investors flood the market, increased investor awareness about how they can protect their money becomes even more important. For instance, new investors may be unaware that their family members were active in the stock market during the 90s boom or even before resulting in the possibility of unclaimed shares lying for them to claim.
There have been a number of documented cases where shares bought by an individual have been lying dormant for years without their family having any idea about it. Their family might even have changed cities, being totally unaware. If these shares lay unclaimed, they are deemed lost. Investors can petition the government to receive the unclaimed dividends and unclaimed shares that belong to them through IEPF recovery.
The team at Infiny Solutions ensures that you always have all the correct information about your shareholdings and any holdings that may be due to you. Our team has access to a vast database and is thus able to identify the rightful claimants of unclaimed shares and unclaimed dividends. We help ensure that you get the money that belongs to you through the claim of shares from IEPF without any risk of being defrauded. So, before you plunge into the newfound IPO boom in India, take some time to explore whether any unclaimed shares belong to you allowing you to avoid the hassle of investing in the current market altogether.