Two initial public offerings (IPOs) were called off last week. First, Southern jewelry chain Zoalukkas took it back 2,300 crore IPO citing poor market conditions. Then Fabindia, a clothing and furniture retail company, canceled it. 4,000 crore IPO citing similar reasons. These pullbacks follow the cancellation of the giant Adani follow-on public offering (FPO), which managed to raise 20,000 crore but decided to cancel the issue in early February and refund investors’ money following a fall in its share prices following the release of the Hindenburg Report.
While the Adani fiasco has indeed affected sentiment adversely, the primary market was in bad shape even before the release of the Hindenburg Report on January 24. E-commerce firm Snapdeal and wearable electronics company boAt had already postponed their IPO plans due to uncertain market conditions. In January. 33 companies planning to launch an IPO from July 2022 49,300 crore is said to have lapsed its regulatory approvals.
Calendar year 2023 (and the second half of FY 2022-23) has thus far been an extremely dry period for the primary market, with no IPOs in January or February. This is much worse than in the previous quarter (October-December 2022), when 18 IPOs were successfully launched – though they were all small and medium businesses that raised relatively small amounts. Before that only four primary issues were seen in July-September 2022.
March could see a revival in IPO activity with nine issues cleared to hit the primary market before the end of the financial year. Avalon Technologies, Capillary Technologies, Cogent Systems, Divgi Torquetransfer Systems, Mankind Pharma, Nexus Mall REIT, Signature Global, TVS Supply Chain and Utkarsh Small Finance Bank’s IPOs are all on schedule, but weak sentiment could cause some of these issues . Adjourned.
This is an almost unprecedented situation. Primary market sentiment is linked to secondary market activity and trends. If the secondary markets are liquid and vibrant, the trend for IPOs is also strong.
Such dry periods in the primary market are not uncommon during bear markets, but while the secondary market has not been bullish, it has not been bearish either. Secondary market trading volumes have been strong. The Nifty is actually up a nominal 3.5% over the last 12 months (though the inflation-adjusted return would be negative). The budget received a good response in most quarters. There is a solid consensus that India will see strong economic growth in 2023-24 and there has been a spurt in interest in construction, heavy engineering and core sectors, as well as the central government’s push to build infrastructure, has investors bullish about it.
So why is the primary market struggling to generate activity? One reason could be the generally negative sentiment caused by rising interest rates and persistently high inflation. The RBI has been forced to raise policy rates several times in the last one year and also cut into liquidity using other tools at its disposal. But it still does not seem to be able to control inflation. High interest rates keep investors away from risk and give them other ways to earn returns in the form of fixed deposits, as banks and non-banking financial companies (NBFCs) offer higher deposit rates to tap household savings. have started.
Another reason could be a change in investment interest. In 2021-22 and early 2022-23, the market saw several startup unicorns hitting the IPO market. These were all tech-driven and largely consumer-oriented, e-commerce plays. Interest in unicorns has since waned, as private consumption has not seen growth, causing many of them to miss their growth projections.
Moreover, there is now a general consensus that many of these businesses raised funds at inflated valuations and since then investors have suffered losses in companies such as Zomato, Paytm and Nykaa. This has led to some degree of caution about IPOs. Moreover, most of the companies that have since canceled their IPOs – such as BOAT, Snapdeal, Fabindia and Joylukkas – are consumption plays, and investors fear high valuations again.
The Securities and Exchange Bureau of India (SEBI) is taking note of the situation on the basis of its recent consultation papers. The regulator recently proposed that merchant banks managing an issue should commit in advance to “hard underwriting”. That is, the lead managers should indicate in advance whether they are prepared to take shares, and in what quantities, if the issue is undersubscribed. It’s made up. It remains to be seen whether such measures will work and how long it will take for the primary market to stabilise.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.