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Reading: The Indian  IPO market is  vibrant. It’s  also broken 
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The Indian  IPO market is  vibrant. It’s  also broken 

Team Happen Recently
Last updated: 2024/01/22 at 10:52 AM
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 India’s IPO market has seen more companies  launch in  the past year than China and Japan combined, but  historically,  most have  been  unprofitable.  

 India is one of the  most vibrant  markets  in the world  for  IPOs. In  the past  year, more businesses were established  than China and  Japan  combined. But if history is  to be believed,  in the long run, most of them will turn out to be  failures. However,  the  appeal  of  “pop” – a significant profit on  the  listing day – means  this fever  will not subside.  

 Something is  seriously  broken. YK2 Partners, a  firm  specializing  in  investing exclusively in the  Indian public markets, has  been counting on over  two decades of  raising  initial  capital  by  domestic companies.  Analysts at  YK2, based in Mumbai  and  London, have reviewed  all  300+ motherboard issues  since January 2004  over  a 10-year trading history.  According to their calculations, the  average IPO in this  group  returned -3.5%  per  year,  turning  an investment of 100 rupees  ($1.2)  into 70 rupees a decade later.  It  doesn’t  matter  if  they  were registered  in 2004 or  2013  or any year in between. Indian IPOs have failed miserably  to generate incremental  returns for investors  compared to  what they  could  have earned passively  simply by holding  a  common  benchmark.  Some  77% have underperformed the NSE500  index  over  the  10-year period, with  an  average underperformance of more than 14%  per year.  In other words,  100 rupees  uninvested for a beginner can become 280 rupees  with very little  effort.  

 “We  are characterizing  the IPO process as a scheme orchestrated by  management,” YK2 co-founders Arun Agarwal and Vinod Nair wrote in a note accompanying their research.  private equity investors, anchor investors, investment bankers, media,  etc.”. “This may  make sense for investors looking for an  IPO,  but not for  long-term  investors like  us.”  

  The regulator’s responsibility is  to ensure that companies with  relatively strong  prospects  enter the  public markets and offer  shares  at  prices  that  create  long-term  wealth. The  Securities and Exchange Board of India has  long  been aware  that the domestic IPO market falls short of this ideal. However,  some of the  measures  attempted or  considered by SEBI have been controversial.  

 One of them  is the IPO rating  (similar to  a bond  credit  rating).  Made mandatory  since  2007,  the classification  became optional in 2014 amid intense lobbying. Another idea  is  to  allow  retail investors  to  return  shares  to  major  shareholders at the issue price after three months of  underperformance. This safety net was considered for  many  years and then  abandoned.  

  However, there is  still  room  to improve the quality of the primary capital market. Clearly, the current  disclosure-based  pricing regime  does  not  meet this  challenge. Just a  few  months ago,  SEBI Chairman  Madhabi Puri  Buch  said that  the excuse companies  often  give to justify  high IPO valuations  is  “nothing but  a few  meaningless English  words”.  

 There may be a simple reason why verbiage can so easily  be disguised  as value:  the  average IPO  generates  an average  listing-day  gain of 25%,  and  India’s  rich have  lots of savings.  Ben Bernanke, the former  chairman of the  Federal  Reserve,  has  previously maintained that  a “global savings  glut” –  a  capital  outflow from  China and oil-producing  countries – is the cause of interest gains.  low  yield.  In  India’s  case,  it is  capital controls that  place limits  on how much the  wealthy  can invest  abroad.  Any excess  local savings  will eventually push  domestic  assets out,  from real estate to IPOs. 

  Real estate  transactions have  a certain  inertia  but  IPO prices reverse  very  quickly. This  explains the average oversubscription  rate  of 44 times in recent years. So how  do you  throw  sand  in  the wheel? The SEBI chief said  on  Friday that the regulator is  probing  investment banks that artificially  inflated requests for shares  to create a false impression of demand.  

 Cleaning up the market is a good first  step  but  not  enough.  YK2’s  Agarwal  suggested  that  SEBI should consider a mandatory  one-year  lock-in period  for all IPO investors so that  subscriptions are  driven by fundamentals and not  pop appeal.  More  revelations would  just  mean  more words. They  cannot  break  the link between abnormal  demand and opportunistic supply. Only more  skins  in the game  are possible.  

 For more  information,  visit at https://happenrecently.com/zepto/?amp=1

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