HNIs, retail investors shun IPOs amid market turmoil

The turmoil in the stock markets has made retail and high net-worth investors (HNI) wary of initial public offerings (IPOs), leaving institutional investors to do the heavy lifting to see share sales through.

The benchmark Sensex shed almost 1,850 points, or 5.1%, in the last one week to close at 34,376.99 on Friday. A little over a month ago, the Sensex had closed at an all-time high of 38,896.6 points.

Against the backdrop of investor confidence shaken due to a falling rupee and rising crude oil and liquidity fears thanks to a string of defaults by Infrastructure Leasing and Financial Services group, three recent IPOs saw little participation from retail and HNI investors and have had to depend heavily on institutional investors.

As per stock exchange data, the ₹ 1,734 crore IPO of housing finance company Aavas Financiers saw HNI and retail investors subscribe to only 26% and 25% of the shares reserved for them, respectively. The IPO made it through on the back of institutional investors, with the category getting subscribed 2.77 times. The IPO closed on 27 September.

Others have fared worse. The share sale of state-run defence manufacturer Garden Reach Shipbuilders and Engineers Ltd had to be extended for three days, eventually sailing through on the back of a 1.81 times subscription in the institutional category. Retail and HNI portions of the share sale were subscribed just 31% and 24%, respectively.

Dinesh Engineers Ltd, which launched its IPO on 28 September, had to abandon its sale after failing to attract enough interest across all three classes of investors.

The recent performance is in stark contrast with previous IPOs of Ircon International and HDFC Asset Management Co. Ltd, which were subscribed multiple times across all categories. (See chart).

“There is a lot of nervousness. Investors in the HNI category generally look to make a quick buck on listing; so they apply heavily. In the current scenario, one is not sure of gains on listing. So, they would typically keep away,” said Prithvi Haldea, chairman of Prime Database group, a primary market tracker. He added that retail participation generally follows institutional participation in an IPO and the latter being weak has had an impact on retail participation.

“The QIB (qualified institutional buyers) subscription has also been poor. Retail takes cues from QIBs, if the QIB book is weak, then you would rarely see retail investors coming in large numbers,” he said. “Market sentiment and other factors are important, but for the retail market the most important cue is QIB subscription. And that has been weak; so retail is bound to be weak.”

Industry experts say market conditions and investor pessimism could mean weak post listing performance for these issuances. “In a falling market, such investors (retail, HNI) could get more cautious. This could translate into weak listing for the issues that are to be listed,” said Arun Kejriwal, director of Kejriwal Research and Financial Services Ltd. However, he added that one could see selective interest from these investors, depending on each issue, particularly the pricing of the issue.