40% IPOs this year failed investors amid weak secondary market conditions

Initial public offerings (IPOs) have attracted droves of retail investors to the stock market in CY22.

But these applicants have lost money on 40 per cent of the fresh issues this year  — a trend that may impact sentiment towards maiden share sales during the remaining part of the year.

Of the 14 companies that have listed this year, five have closed below their issue price.

The trend is not very different when compared with the same period last year.

Five of 16 companies that had listed during the first five months of 2021 had delivered negative listing day gains.

But the average listing day gain for the 14 newly listed firms this year is 8 per cent, down from 25 per cent for the 16 stocks last year.

Investment bankers say weakness in the secondary market and sustained selling by foreign portfolio investors (FPIs) have weighed on IPO subscriptions and listing-day performance.

The benchmark Nifty50 index has been choppy, swinging over 15 per cent; currently, the index is down 5.5 per cent on a year-to-date basis.

“For the IPO market to perform well, you need a stable secondary market. It is not necessary that the market should rally but intense volatility takes a toll on IPO pricing and valuations.

"Typically, IPOs pricing is aligned with the listed peer set.

"But in an environment where valuations of the listed universe gyrate wildly, it becomes challenging for new stock market entrants,” said an investment banker.

Market players said the decline in FPI participation is the key reason for lukewarm listings this year.

On a year-to-date basis, FPIs have sold shares worth Rs 1.7 trillion ($22.3 billion).

“Subscription levels by FPIs have come down substantially, forcing domestic institutions such as mutual funds to make up for the shortfall.

"As a result, the follow-up buying that is needed when a stock gets listed is missing.

"For a healthy IPO market, you need participation from all the categories of investors,” said another investment banker.

The bulk of the subscription for LIC’s Rs 20,557-crore IPO came from individual investors and domestic institutions, with FPIs submitting bids of less than Rs 1,800 crore.

Shares of LIC fell 8 per cent on their debut and are currently down more than 11 per cent over the issue price.

When it comes to listing-day performance, Rainbow Children's Medicare, a company that operates a chain of paediatric hospitals, and Prudent Corporate Advisory, a mutual fund distributor, have delivered the worst returns.

The IPOs and listing of both took place during the sharp bout of correction seen earlier this month.

Several companies, including LIC and logistics major Delhivery, had to prune their IPO size amid challenging market conditions.

Industry players say companies waiting on the sidelines also have to bring down their valuation expectations or shelve their listing plans.

“The IPO momentum from the blockbuster 2021 has not carried over to 2022.

"Issuance and proceeds are well off last year's pace, as geopolitical uncertainty, along with other macro factors, continue to affect investor sentiment.

"The backlog of IPOs may lead to a strong upswing in volumes if volatility moderates and earnings are robust,” stated Sandip Khetan, partner and financial accounting advisory services leader, EY India earlier this month.