IPOs set to boom in 2025 as 87 companies eye market debut

Primary market activity always follows a buoyant, or at least, a stable secondary market, albeit with a lag. Ever since Covid-19 struck in March 2020 and indices hit significant lows, the market sentiment has bounced back with a vengeance, leading to a secular run-up, with the indices now almost at all-time highs, despite the recent correction.

Commensurately, there has been significant activity in the IPO (initial public offering) market as well. While 2020 saw Rs. 26,612 crore being raised through main-board IPOs, the good run continued in 2024 with an all-time high of Rs.1,52,629 crore being raised (as of December 13).

From various accounts, the Indian secondary market seems poised to continue its stellar run on account of political stability, several favourable macroeconomic indicators, and abundant liquidity from both domestic and foreign investors. The impact of this shall be felt in the primary market too. The pipeline is incredibly strong; as many as 32 companies have Sebi approval to raise Rs. 42,000 crore, while another 55 companies looking to raise Rs. 1.15 lakh crore are awaiting approval from Sebi.

New filings are also likely to see a significant spurt in the coming months. Importantly, unlike in the recent years when a large number of companies going for IPOs were from the BFSI (banking, financial services, and insurance) sector, most IPOs in the last two years and also those in the pipeline span multiple sectors.

Another strong trend that shall only become more pronounced is that of companies backed by private equity investors coming to the market, where such investors are able to exit their investments. This is unlike the past decades when the majority of companies were raising risk capital directly from the retail investors, causing huge harm.

In more good news for investors, investing in IPOs has become far simpler and more efficient. From months being taken by a tedious physical process, listing is now happening in just three days after issue closing. The application process too has been significantly simplified and is now just a matter of a few clicks on a mobile phone. Sebi’s increasing use of technology across the entire marketplace operation is delivering cost efficiencies and also better monitoring.

There has also been a significant improvement in the time taken to issue approvals to draft prospectuses. Guidelines were issued to investment bankers stating that they shall return the offer document in the first scrutiny itself if these are found significantly wanting, which has helped.

Yet another trend gaining strength is "atmanirbharta" with the declining dependence on foreign portfolio investors. Domestic institutional investors, especially mutual funds, are becoming bigger in size as these are witnessing huge inflows.

One issue that continues to dominate discussions is the “overpricing” of IPOs. First, what needs to be realised is that most companies that come to the market are promoter-controlled, and, even after the IPO, such promoters continue to hold significant shares in the company. As such, it is in their best interest that the stock price goes up post listing, as they have the most to gain. On the other hand, the merchant bankers need to face the same institutional investors time and again and, as such, are wary of overpricing. In any case, no issuer would take the huge risk of his IPO failing; relaunches are always looked down upon. In reality, it is the anchor investors who have now been deciding the offer prices.

The old mindset wherein all IPOs are expected to give positive returns not only on listing but until perpetuity also continues. The reality is that once an IPO gets listed, it becomes like any other secondary market stock whose price goes up and down based on the performance of the company, sector, and broader economy. IPO pricing should at best be judged on listing day.

Regrettably, though, IPO investing is increasingly becoming a gamble with most investors looking only for listing gains. Recent Sebi data shows that 43% of shares allotted to retail investors were sold within a week. For HNIs, this figure was an even higher 63%. In a bullish market, when IPOs happen with huge oversubscriptions, almost all IPOs list at a premium to the offer price. Data for 2024 shows that 76% of IPOs gave positive returns on listing day.

Finally, here’s some advice for retail investors. IPO investing shall always remain about two elements: the quality of the company and the valuation at which it is being offered. Investors would do well to remember that even a great company at an expensive valuation makes for a bad investment. Investors should exercise caution as investing in IPOs is riskier than investing in direct equity because of information asymmetry and limited price discovery.

Also, a word of caution: As we have seen many a time in the past, it doesn’t take much for sentiment to turn. In 2022 and 2023, despite relatively buoyant markets, as many as 80 companies looking to raise Rs.1.2 lakh crore let their Sebi approval to launch their IPO lapse or withdrew their offer document. Even now, there are concerns about weak earnings, geopolitical tensions, foreign outflows, etc., which could stall the march of the secondary market, which in turn would impact the IPO market as well.

Views are personal. The author is Pranav Haldea, MD, Prime Database Group.