A recent study by the Department of Economic and Policy Analysis has shed light on investor behavior in Initial Public Offerings (IPOs) in India. The analysis, which examined data from 144 main board IPOs listed between April 2021 and December 2023, reveals significant insights into the patterns of buying and selling among different investor categories.
Key Findings:
- High Rate of Early Exits: The study found that 54% of IPO shares (by value) allotted to investors, excluding anchor investors, were sold within a week of listing. This indicates a strong tendency for short-term profit-taking among IPO investors.
- Individual Investor Behavior: Retail investors sold 42.7% of their allotted shares within a week, while Non-Institutional Investors (NIIs) sold 63.3% in the same period. This suggests that individual investors, particularly NIIs, are more likely to engage in short-term trading strategies.
- Institutional Investor Patterns: Qualified Institutional Buyers (QIBs) showed more varied behavior. While some categories of QIBs held onto their shares longer, “Exclusive QIBs” (non-anchor institutional buyers) sold 65.4% of their allotted shares within a week.
- Correlation with Listing Gains: The study observed a positive correlation between listing gains and the percentage of shares exited. IPOs with gains exceeding 20% in the first week saw higher exit rates across all investor categories.
- Impact of Issue Size and Subscription Levels: Smaller issues (below ₹1,000 crore) and heavily oversubscribed IPOs tended to see higher exit rates, particularly among individual investors.
- Policy Impact: Recent policy changes implemented in April 2022, including lottery-based allotment for NIIs and restrictions on IPO funding, have had noticeable effects:
- The number of high-value NII applications (over ₹1 crore) dropped significantly.
- Oversubscription levels in the NII category decreased from 37.5 times to 17.2 times.
- Exit rates for “big ticket” NII investors reduced considerably.
- Geographical Distribution: The study revealed that about 70% of IPO investors were from just four states: Gujarat, Maharashtra, Rajasthan, and Uttar Pradesh. Gujarat alone accounted for 39.3% of retail allotments.
- Post-Listing Shareholding: While the number of individual shareholders decreased significantly immediately after listing, the overall shareholding pattern remained relatively stable over the first year post-IPO.
Implications:
This study highlights the prevalence of short-term trading strategies in the Indian IPO market, particularly among individual investors. The high rate of early exits suggests that many investors view IPOs as quick profit opportunities rather than long-term investments.
The findings also demonstrate the effectiveness of recent regulatory changes in moderating some of the more speculative behaviors, particularly in the NII category. However, the continued high exit rates across investor categories indicate that further measures may be needed to encourage longer-term holding of IPO shares.
For policymakers and market regulators, this study provides valuable insights that could inform future regulations aimed at creating a more stable and sustainable IPO market. For investors, it offers a clearer picture of market dynamics, potentially aiding in more informed decision-making.
As the Indian capital markets continue to evolve, understanding these patterns of investor behavior will be crucial for all stakeholders in ensuring the health and efficiency of the IPO ecosystem.
