Primary driver: How average listing gains are pushing IPO subscriptions

The frenzy that centred round the SME (small and medium enterprises) initial public offering (IPO) of Resourceful Automobile indicates the primary market is in a phase of irrational exuberance. Resourceful Automobile, a motorcycle dealer with two showrooms and a workforce of eight, was seeking to raise a modest Rs 12 crore. It received bids worth Rs 4,800 crore. Most of the investors were retail/non-institutional. Moreover, this is not the only SME IPO that has received high levels of oversubscription in the recent past. An astounding 219,000 individuals, on average, have applied for every IPO thus far in FY25. In contrast, FY20 saw an average of 408 individual applications for each IPO, rising to only 511 in FY21. Apart from Resourceful Automobile, many IPOs like Hoac, Foods India, Medicamen Organics, Koura Fine Diamond Jewelry, and Maxposure have enjoyed retail oversubscription of over a thousand times.

On average, IPOs in FY25 have gained a whopping 76 per cent on listing day. At least 60 IPOs have listed in 2024 at premiums of over 90 per cent. This follows in the wake of a highly bullish FY24, when average listing gains exceeded 50 per cent, and applications hit 113,000 per IPO. All this indicates a speculative mood with retail investors. A Securities and Exchange Board of India (Sebi) study, which examined the trading patterns of over 90 million IPO investors, noted a majority of investors sold within a week, while 70 per cent sold within the year. Even qualified institutional buyers (QIBs) sold 65.4 per cent of the shares allotted within a week, and 87.8 per cent within a year. That same study, which covered 144 IPOs that raised Rs 2.13 trillion between 2021 and 2023, indicated that 75 per cent of these (108 IPOs) delivered positive returns, with 26 IPOs hitting more than 50 per cent returns on the listing day. The holding period was even shorter for IPOs of below Rs 1,000 crore. This points to an attitude of looking to make a quick buck, regardless of the fundamentals.

That bull market continues and it has encouraged targeting short-term gains. In effect, this has become a lottery, given very high oversubscription and excess demand that drives up the listing price. Buoyed up by quick returns, investors now tend to invest in all IPOs, hoping for some allotments, with a high likelihood of listing gains. Ironically, the simplicity of trading processes and the fact that funds remain in the investor’s bank account until allotment may encourage this behaviour. Sebi has issued a cautionary advisory regarding SME IPOs (which is approved by the stock exchanges and not Sebi) due to the exuberance. It has also warned that unscrupulous promoters often present a misleadingly positive picture, and capitalise on this momentum to offload holdings at profit. The National Stock Exchange has been asked to implement a cap of 90 per cent over the offer price for SME IPOs during a special pre-open session on listing day. Many market experts have also advised caution.

However, history suggests that momentum of this nature cannot be halted by mere cautionary advisories. Sober advice will be ignored until such time as there is a crash in the primary market, or some event dampens overall market sentiment. Retail investors would be well advised to approach the market with caution and the exchanges must ensure that only quality issues make it to the market. However, the silver lining is that deserving SMEs will be able to raise money easily.