The Indian IPO market has witnessed a surge in retail participation in recent years, leading to heightened oversubscription. The Securities and Exchange Board of India (SEBI) conducted a comprehensive study to understand investor behavior in this dynamic landscape. The study focused on IPOs listed on the main board between April 2021 and December 2023, encompassing 144 IPOs that collectively raised Rs 2.13 lakh crore. This analysis provides valuable insights into investor behavior, particularly regarding their propensity to sell IPO shares shortly after listing.

Investor Behavior in the IPO Market: A Focus on Flipping

The study reveals a prominent tendency among investors to sell IPO shares quickly, particularly those that exhibit positive listing gains. This behavior, termed the “disposition effect,” showcases a predilection to prematurely exit profitable investments.

Selling Trends: A Quick Overview

The study found that 54% of IPO shares (in value terms) allotted to investors (excluding anchor investors) were sold within a week of listing.

• Individual investors proved to be the most active sellers, offloading 50.2% of their allocated shares within the first week.
• Non-institutional investors (NIIs) sold 63.3% of their holdings within the same timeframe.
• Retail investors had a lower selling rate, with 42.7% of shares sold within a week.

Selling Driven by Returns:

Investor selling behavior exhibited a strong correlation with the IPO’s performance:

• When IPO returns surpassed 20% within a week, individual investors sold 67.6% of their shares within the same period.
• However, when IPOs listed at a loss, the selling rate dropped to only 23.3% of shares sold within a week.

The Impact of Policy Interventions on IPO Market Dynamics

SEBI and the Reserve Bank of India (RBI) implemented policy measures to address the oversubscription issues in the NII category and control the influx of IPO funding by Non-Banking Finance Companies (NBFCs).

Impact of Policy Interventions:

• SEBI’s changes to the share allotment methodology for NIIs in April 2022, shifting from a pro-rata basis to a lottery system, and subdividing the category into “small-NII” and “big-NII,” had a noticeable impact.
• The oversubscription under the NII category declined from 38 times to 17 times in the post-policy period.
• The number of “big-ticket NII investors” (those applying for more than Rs 1 crore in IPOs) saw a considerable decrease from around 626 applications per IPO in the pre-policy period (April 2021-March 2022) to only 20 applications per IPO in the post-policy period (April 2022-December 2023).
• The exit rate of big-ticket NII investors also experienced a significant drop, going from approximately 70% within a week during April 2021-March 2022 to about 25% within a week during April 2022-December 2023.
• RBI’s guidelines on IPO funding by NBFCs, introduced in April 2022, limited IPO funding by NBFCs to Rs 1 crore per borrower.

Growth in Demat Accounts: Fueling IPO Participation

The surge in IPO participation can be partially attributed to the significant growth in demat accounts. Nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during the post-COVID period (2021-2023), demonstrating a rising interest in equity markets among retail investors.

Geographical Distribution of Retail Investors:

The study also highlighted the geographic distribution of retail investors participating in IPOs:

• Gujarat dominated with 39.3% of the retail allotment.
• Maharashtra received 13.5% of the allotment.
• Rajasthan received 10.5%.

Investor Behavior Across Different Classes:

While retail investors tended to sell more quickly, other investor categories demonstrated distinct patterns:

• Mutual Funds: Typically invest for longer periods in IPO shares. Only about 3.3% of their allocated value was sold within a week of listing.
• Banks: On the contrary, exhibit a strong inclination to sell quickly, with 79.8% of the allotted value offloaded within a week.

Takeaways:

• The study’s findings provide valuable insights into investor behavior in the IPO market.
• Flipping remains a prominent aspect of IPO market dynamics, with individual investors driving the trend.
• Policy interventions, such as SEBI’s changes to the NII allotment process and RBI’s restrictions on IPO funding by NBFCs, have impacted the market dynamics.
• The significant growth in demat accounts underscores the increasing retail participation in the IPO market.
• Investors need to carefully analyze IPOs before making investment decisions and be aware of the potential for short-term market fluctuations.

The SEBI study sheds light on the intricate interplay between policy measures, investor behavior, and IPO market dynamics in India. Understanding these complexities is crucial for investors navigating the IPO landscape. As the IPO market continues to evolve, further research and analysis are essential to address the dynamics and ensure a balanced and robust market environment.