Markets
Five milestones that shaped India’s IPO journey
Summary
By opening the door for India’s internet companies to list their shares, Zomato could well go down as a central event in India’s primary market history. Before Zomato, there were four other milestones that left an indelible impact on companies, investors, and the rules of the gameThe spectacular stock market listing of food-delivery company Zomato is likely to pave the way for other large internet businesses to raise capital from the public. This marks the beginning of a new chapter in India’s primary market, which has had a chequered history ever since multinationals were forced to offer shares to the public under a new law and Reliance Industries first breathed life into it in the late 1970s. Since then, there have been four key events that have reshaped the primary capital markets. Each has widened the pool of companies, or expanded the community of investors, or served as a reference point for rule changes.
Reliance Debuts
In 1977, Reliance Industries Limited (RIL) issued shares to the public for the first time. The issue size was ₹2.82 crore and was priced at par value. It set in motion events that would lead to RIL playing a central role in drawing individual investors to equity investing. Founder Dhirubhai Ambani actively used public capital to expand his business. The annual general meetings of RIL started becoming grand affairs, with an outpouring from small investors. Dhirubhai started acquiring cult status.
Riding on that popularity, in a five-year period on either side of India’s 1991 liberalisation push, Dhirubhai launched four big public issues. Each time it was for a project coming up from scratch. Each received a thumping response but didn’t deliver exceptional returns. Each of these companies was soon merged into RIL, often on terms favourable to the promoters. Yet, RIL’s pull among small investors has persisted.
The Wild 90’s
Along with RIL, liberalization also expanded the primary market. In April 1992, capital market regulator Sebi (Securities and Exchange Board of India) was set up. Four months later, the Capital Controller of Issues (CCI) was abolished. The CCI was a government body that decided the price of an issue, among other things. Companies were now free to price their issues and raise capital, and only needed clearance from Sebi.
The beginning of a free-pricing regime saw many excesses. Companies flooded the primary market to raise capital. In 1991-92, the last year under CCI, there were 195 public issues. The annual average over the next five years was 942 issues.
Promoters used the capital raised to enrich themselves. Many of these companies are no longer around. These excesses would pave the way for rule changes that aimed to protect investors from rogue companies and practices.
IT listings
In that deluge of new issues, one belonged to Infosys, in 1993. That share sale was barely subscribed. But as the Indian economy opened up, it created new business opportunities. One of these was India as an offshoring base. Indian companies in software services and business processing were able to convince clients in the US to do the same work from India at a lower cost. Infosys and Wipro were the prime movers.
More IT companies were formed, more gained in size, and more listed on the bourses. But none captured investor imagination as Infosys and Wipro, and later, TCS did. Of the 30 stocks that make up the BSE Sensex today, 13 have been listed for above 25 years. Infosys leads in shareholder returns among this set, delivering a compounded annual return of 35%. ₹100 invested in Infosys in July 1996 is now worth ₹1.67 lakh.
Operation Clean-Up
Each story like Infosys, each market boom, expanded the pool of investors. Just as the market was evolving, so were the rules, often in response to fraudulent practices. In 2005, for example, there was the IPO demat scam, where thousands of fake depository accounts were opened by certain entities to increase allotments in public issues. Checks and balances were reviewed after the excesses of the 1990s, but it was a gradual process.
The change in rules encompassed just about every dimension of an IPO. This included financial track record of the company, disclosures required of promoters, minimum public shareholding to ensure a good number of shares were in circulation, reservation for institutional investors to make them participate, and advertising code of conduct. The number of issues is down from the deluge of the early-nineties, but the quality is better. One measure of this is the gradual increase in the average amount raised.
2021: Digital Boom
Zomato’s listing opens the doors for internet businesses, which are barely present on the stock market. Typically, these businesses tend to be capital-guzzling and loss-making. So far, this perennial need for capital has been met by venture capital funds. In May, Sebi increased the incentive for them to list on the innovators growth platform. The main change was the reduction of the period for which 25% of such a company’s pre-issue capital needed to be held by large investors, from two years to one. Zomato was the first off the blocks. The response to its issue suggests investors feel growth prospects of internet businesses outweighs their current loss-making status, a belief that will be tested in the market. Next up are Paytm and Mobikwik.
A host of other internet businesses of relevance are waiting. According to a March 2021 report by Credit Suisse, while India had 336 listed companies with a market capitalization of above $1 billion (about ₹7,500 crore), another 100 were unlisted. The internet underpins a majority of their businesses models—e-commerce, fintech, edtech, food delivery, software-as-a-service and gaming, among others. Further, two-thirds were set up in the last 20 years. They could well write the next chapter of India’s primary market story.
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