IPO Revolution: Exploring the Surge in IPO Offerings in India

Capital markets of a country are reflection of its economic health and trend of investor confidence in that countries policy and framework. They act as a platform for new companies to raise capital and fund their projects or idea. One of the methods for raising funds through capital markets is an Initial public offer (IPO). IPO is the process through which a private company list itself in the capital market by selling its share to the investors. In recent years, IPO market in India has witnessed a robust growth with 243 new companies doing so in 2023. In this blog, we will talk about reasons behind recent IPO boom in India and the future potential.

IPO trends in India

• Capital markets across the globe witnessed subdued demand and selling pressure in 2020 as investors moved to safe heavens due to uncertainty around the outcome of the pandemic. As the pandemic situation eased in 2021, investors returned to the capital markets. The race to recovery after the easing of the pandemic resulted in several stimulus packages from government across the worlds, boosting business environment, and investor confidence. As a result, 2021 witnessed a record number of IPOs, both globally and in the Indian domestic market.
• However, in the subsequent years, there was a decrease in IPOs in the global markets. The number of IPOs in 2022 and 2023 decreased by 48.2% and 15.8%, respectively. The total value of transactions also declined by 71.2% in 2022 and 33.6% in 2023. Nevertheless, India defied the trend, experiencing a significant increase of 22.5% in the number of IPOs in 2022 and a 65% increase in the number of companies going public in 2023.

Source: S&P Global report

• With 31 IPOs, fourth quarter of 2023 was the best performing quarter. This represented an impressive 72% jump from the last quarter of 2022 and a notable 41% rise from the third quarter of 2023.
• The small and medium-sized business markets experienced growth in the last quarter of 2023, with 61 new IPOs. There was a 79% increase from the last quarter of 2022 and a 30% increase from the third quarter of 2023.

Factors driving the IPO boom

The recent rise in IPO activity in India can be driven by three primary factors: Growing retail investor participation and favourable regulatory reforms.

Retail investor participation

India has experienced a large number of retail investors participating from last few years. In monetary value, they bought shares amounting to a US$ 17.87 billion (Rs. 1.49 lakh crore). This is twice the amount of total IPO funds raised in 2022.

Few examples of IPO with huge retail participations are:

• Tata Technologies with 52.11 lakh applications
• DOMS Industries with 41.30 lakh applications
• INOX India with 37.34 lakh applications

As of March 1, 2024, NSE reached nine crore unique registered investors and 16.9 crore client codes. Daily new unique registrations ranged from 47,000 in October to 78,000 in January, highlighting sustained investor interest.

Favourable regulatory reforms

SEBI initiatives to streamline processes for investors and companies

SEBI's strategic decision to shorten IPO listing timelines from T+6 to T+3 days represents a major move towards optimising the IPO process, rendering it more appealing to both issuers and investors. This acceleration in the listing process enables issuers to expedite access to capital, enhance market sentiment, reduce pricing uncertainties, and streamline administrative procedures. For investors, it translates to earlier share access, lower holding period risks, improved liquidity, and more confidence in Indian capital markets.

Other key reforms

• Introduction of pre-filing for draft offer documents and disclosure of key performance indicators.
• Modification to the responsibilities of regulatory oversight bodies to enhance transparency and efficiency.
• Implementation of an electronic initial public offering (e-IPO) system facilitating online application for shares.

• Elimination of the need for physical applications, enhancing accessibility and efficiency, for retail investors.
• Introduction of a fast-track approval process for companies with strong corporate governance and financial performance.
• Reduction of the number of days for qualifying companies to receive approval for their DRHP to 21 days from the standard 60-90 days.

Navigating IPO surge: Challenges and impact on capital markets

Challenges and risks

Due diligence is important for investors and companies during the IPO process. For investors, it ensures informed decisions by assessing company financials and risks. For companies, this helps in promoting transparency. This also reduces legal and financial risks for the companies, boosting investor confidence, and laying a foundation for a successful and sustainable IPO journey.

Impact on capital markets

Increased market capitalisation: As more companies go public, the total market value of listed companies rises, indicating overall growth and expansion of the stock market.

Enhanced liquidity: As companies launch their IPOs, additional shares enter the market for purchase and sale. This boost in liquidity simplifies the process for investors to trade shares and contributes to a more efficient operation of the market.

Financial Inclusion: IPOs give common people the chance to invest in companies that are growing. This allows individuals to join in on creating wealth and potentially benefit from the company's success, which helps more people become financially included.

The rise in new listings is changing how people invest by offering more options and promoting competition, therefore, forcing companies to think out of the box and come up with new ideas to distinguish themselves. This drives advancements across various sectors. Such a dynamic setting provides investors with a wider range of options and fosters economic growth by promoting competition and innovation.

Outlook for IPOs in India

As of June 2023, 3% of India's population is involved in the Capital market. And moving forward, this percentage is expected to grow as more people join because of the rising disposable income. This rise in investors can positively influence the Indian stock market, creating opportunities for both businesses and investors.

Also, a higher number of companies are expected to go public in FY25, raising total funds of Rs. 1 lakh crore (US$ 12 billion), because of positive investor sentiment, strong economy, and prediction of reduced inflation and interest rates.