IPOs in India: Are there cycles or windows for public issues?

From the time I started my career in the late 90s, I have witnessed gyrations as demonstrated below. The boom period of many initial public offerings (IPOs) being played out in FY01 and then in FY06, with the in-between years being a struggle with deals drought, made all of us tout that IPOs are cyclical events and that there are windows of opportunity. However, the last few years have seen this curve becoming smoother and except for an additional surge in FY22 we are seeing a steady IPO market with about 50-60 IPOs a year. And as the deal sizes have increased from an average of Rs. 240 crore at the start of the millennium to the current average of Rs. 1,270 crore, the market has become 3x bigger and is growing well.

What has changed over the last 30-odd years?

Very simply put, the proportion of Foreign Portfolio Investment (FPI) has come down. From the high of 30% composition of the Indian market capitalisation in the 1990s and 20% in 2015, we are seeing the number to be more like 16.5% today which is the lowest ever in the last decade. From a secondary market perspective, if you see the FII flow data, they have continued to have their cycles of interest in putting capital into the Indian market. Of course, since these funds were global in nature and had the option to cherry-pick the geographies where they wanted to focus their investment allocation, the Indian market was always susceptible to the vagaries of the FIIs. And it did not help that they owned ~30% of the market capitalisation.

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Post the GFC however, the Indian MF industry has seen a significant uptick in their inflows. The MF industry AUM has grown from ~Rs. 5 lakh crores in 2008 to Rs. 50 lakh crores recently, a 10-fold increase in 15 years. The rise of the MFs, along with insurance companies, newer asset classes like AIFs and systemically important NBFCs, etc. has meant that there are more and more investors using IPOs as a way to play their equities allocation.

There was a time when pricing and sizing in IPOs were significantly, if not entirely, directed by FIIs. The domestic MF industry, which was the main investor in equities, lacked the size and depth to be influential, so they tended to be followers. With the growth of the mutual funds, and other institutional investors as mentioned earlier, not to mention the changing dynamics of the individual investor mind-set, the script has now been flipped on its head. The domestic institutional investors are proactive and aggressive in taking their calls on valuation and demand, and this has meant a reduced dependence on FIIs.

Even looking at the recent 4 years’ trend of IPOs which have been listed on Indian stock exchanges, from the high of 55% few years back, FII composition in the anchor book is down to 36% and domestic institutional investors are driving the IPO participation which is amplified with higher HNI and retail participation.

Ajay Garg is Founder and Managing Director of Equirus