Where have all the IPOs gone?

Such dry periods in the primary market are not uncommon during bear markets, but while the secondary market has not been bullish, it hasn’t been bearish either (Photo: PTI)
Such dry periods in the primary market are not uncommon during bear markets, but while the secondary market has not been bullish, it hasn’t been bearish either (Photo: PTI)

Summary

  • Since July 2022, 33 companies planning IPOs worth a combined 49,300 crore are said to have allowed their regulatory approvals to lapse

Last week saw the withdrawal of two initial public offerings (IPO). First, the southern jewellery chain Joyalukkas withdrew its 2,300 crore IPO, citing poor market conditions. Then Fabindia, the clothing and furniture retailer, cancelled its 4,000 crore IPO, citing similar reasons. These pullbacks follow the cancellation of the gigantic Adani follow-on public offering (FPO), which managed to raise 20,000 crore but decided to cancel the issue in early February and return investors’ money after its stock prices crashed following the release of the Hindenburg report.

While the Adani fiasco has indeed affected sentiment adversely, the primary market was in poor shape even before the release of the Hindenburg report on January 24. E-commerce firm Snapdeal and wearable electronics company boAt had already shelved their IPO plans due to uncertain market conditions in January. Since July 2022, 33 companies planning IPOs worth a combined 49,300 crore are said to have allowed their regulatory approvals to lapse.

Calendar year 2023 (and the second half of fiscal 2022-23) has thus been an extremely dry period for the primary market, with no IPOs in either January or February. This is much worse than the previous quarter (Oct-Dec 2022), when 18 IPOs were launched successfully – though all of them were small and medium businesses that raised relatively small amounts. Prior to that, July-Sep 2022 saw just four primary issues.

March could see a revival in IPO activity, with up to nine issues cleared to hit the primary market before the end of the fiscal year. The IPOs of Avalon Technologies, Capillary Technologies, Cogent Systems, Divgi TorqTransfer Systems, Mankind Pharma, Nexus Malls REIT, Signature Global, TVS Supply Chain, and Utkarsh Small Finance Bank are all on schedule but weakening sentiment could cause some of these issues to be deferred.

This is an almost unprecedented situation. Primary market sentiment is connected to secondary market activity and trends. If secondary markets are liquid and vibrant, IPO trends tend to be strong as well.

Such dry periods in the primary market are not uncommon during bear markets, but while the secondary market has not been bullish, it hasn’t been bearish either. Secondary market trading volumes have been strong. The Nifty is actually up by a nominal 3.5% in the past 12 months (though inflation-adjusted returns would be negative). The budget was well-received in most quarters. There’s a solid consensus that India will see strong economic growth in 2023-24 and there’s been a boom in interest across the construction, heavy engineering and core sectors, with investors quite enthusiastic about the central government’s push for infrastructure creation.

So why is the primary market struggling to generate activity? One reason could be the generally negative sentiment caused by rising interest rates and persistent high inflation. The RBI has been forced to raise policy rates multiple times in the past year and has also cut liquidity using the other tools at its disposal. But it still doesn’t seem to have brought inflation under control. High interest rates tend to make investors risk averse and also give them other ways of earning returns in terms of fixed deposits, since banks and non-banking financial companies (NBFC) have started to offer higher deposit rates to tap household savings.

Another reason could be a shift in investment interest. Through 2021-22 and early 2022-23, the market saw several startup unicorns hit the IPO market. These were all tech-driven and largely consumer-centric, e-commerce plays. Interest in the unicorns has dissipated since, because private consumption hasn’t seen an uptick, leading to many of them missing their growth projections.

Also, there is consensus now that many of these businesses raised money at inflated valuations and investors have since suffered losses in companies such as Zomato, Paytm and Nykaa. This has led to a degree of caution about IPOs. Moreover, most of the companies that have cancelled their IPOs since then – such as bOAT, Snapdeal, Fabindia and Joyalukkas – are consumption plays, and investors fear being burnt by high valuations again.

The Securities and Exchange Bureau of India (SEBI) is taking note of this situation, going by its recent consultation papers. The regulator has recently proposed that merchant banks managing an issue should commit upfront to “hard underwriting". That is, lead managers should state upfront if they are prepared to pick up shares, and in what quantity, if the issue is undersubscribed. It remains to be seen if such measures will work, and how long it will take for the primary market to stabilise.

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