Over the previous few weeks, they’ve been hand-holding long-time policyholders on the procedures that must be accomplished upfront to smoothen the method of subscribing to the upcoming preliminary public supply (IPO) of the insurance coverage behemoth.
“We’re receiving (many) queries from clients after LIC ran ads about its IPO,” mentioned an insurance coverage agent with the corporate, who requested anonymity.
The frenzy across the proposed LIC share sale is already palpable. The IPO—set to be the most important in Indian inventory market historical past—is predicted to go reside by March 2022. And 10% of the problem dimension is ready to be reserved for policyholders. Will probably be a first-of-its-kind experiment and will trigger a flurry of first-time traders to enter the inventory market.
“Most of LIC’s policyholders are on the backside of the pyramid. An effort is being made to get them into the inventory market,” mentioned Arun Kejriwal, founding father of Kejriwal Analysis and Funding Companies. “The train is considerably just like how Jan-Dhan Yojana introduced the unbanked inhabitants into the banking system.”
What unfolds as soon as LIC lists will simply be the start. The 12 months 2022 is fraught with motion after the file subscriptions, stellar listings and bumper retail investor participation of 2021.
If the LIC IPO is the principle spotlight over the subsequent few months, the introduction of latest IPO guidelines from 1 April—which the market regulator Sebi introduced in December—will set the ball rolling for a completely new expertise within the main market.
To high it, the Reserve Financial institution of India (RBI) has put in place new lending restrictions from the identical month. The central financial institution’s new guidelines will put limits on the funding faucet for prime networth people (HNIs) after they attempt to spend money on IPOs.
However, very first thing first. Retail traders are excited about wealth creation and good returns. Are IPOs actually money-spinners? The info reveals in any other case.
The scary IPO story
In case you have been to learn 10 IPO notes by completely different broking corporations, you’ll discover eight of them suggesting that you just “subscribe to the IPOs for the long-term”. However, must you subscribe?
For traders who would need to imagine in brokerage suggestions, historical past throws up a warning signal. Solely 45% IPOs listed since 2000 have delivered constructive returns for traders. The remaining are both buying and selling under their challenge worth or have been delisted or obtained merged with different listed entities.
For many who like to guess on itemizing good points, one in three bets find yourself going improper (primarily based on the post-2000 observe file). Whereas 66% of points did checklist greater on the inventory exchanges, solely about 51% might muster a acquire greater than 10% on debut.
“Hitting a jackpot by way of IPOs isn’t any higher than flipping a coin,” mentioned Vivek Bajaj, founding father of inventory market analytics platform StockEdge
The historic information holds significance particularly in mild of the mega LIC IPO. IPOs that are launched with a lot fanfare not often carry out nicely on the inventory market. Six out of the highest ten greatest IPOs ever have been buying and selling under their challenge costs as on 31 December 2021. These embrace One 97 Communications Ltd (-37%), Coal India Ltd (-40%), Basic Insurance coverage Corp. of India (-69%), Reliance Energy (-95%), New India Assurance (-65%) and DLF (-26%). Furthermore, solely 5 out of the highest 10 greatest IPOs have registered itemizing good points.
Nevertheless, Deepak Shenoy, founder, Capital Thoughts, factors out that it’s improper to say that IPOs don’t earn a living. “In case you had invested at the very least one lot (as much as ₹15,000) in every IPO in 2021, you’ll have nonetheless made cash general. You can not anticipate all IPOs to do nicely. In order for you assured returns, spend money on fastened deposits,” Shenoy mentioned.
If there are loss-making IPOs, then there are some reminiscent of Divi’s Laboratories Ltd and Astral Poly Technik which have returned over 40% CAGR since their itemizing day 19 years and 15 years in the past, respectively. “IPOs give a superb entry level to purchase and maintain basically robust corporations for the long-term. Solely about 50% may offer you constructive returns, however these can be long-term wealth creators… with 50% accuracy, you can nonetheless make (a) lot of cash,” mentioned Bajaj of StockEdge
Earlier, solely worthwhile corporations with a three-year revenue track-record might give you IPOs. However the 12 months 2021 has seen the itemizing of a spate of loss-making new-age corporations reminiscent of Zomato, Paytm, Nykaa, Policybazaar and Cartrade, and many others. May these be long-term wealth creators?
“I imagine most new-age corporations will disappear inside 10 years,” mentioned Kejriwal of Kejriwal Analysis and Funding Companies. “Their market cap is already nicely past expectations,” he added.
“(Clearly), there’s info asymmetry within the main market. Service provider bankers do road-shows with institutional traders and repair the problem worth by the book-building course of. Retail traders are the final ones within the funding chain,” mentioned a service provider banker on situation of anonymity. “More often than not, institutional (traders) are provided kickbacks to subscribe to the problem. On the face of it, they may very well be subscribing to the IPO on the challenge worth, however the precise shopping for worth may very well be decrease. Retail traders get trapped on this setup.”
As India’s IPO market matures and expands, extra guidelines to guard the small investor are inevitable. To market regulator Sebi’s credit score, present guidelines already make sure that not more than 10% of the problem dimension of a loss-making entity can go to retail traders on the time of an IPO. Such corporations additionally must allot 75% of the online public supply to Certified Institutional Patrons (QIBs) reminiscent of insurance coverage corporations, mutual fund corporations, and various funding funds.
However the 10% cap on the retail portion doesn’t supply an enough stage of safeguard, mentioned Kulbhushan Parashar, Director, Company Capital Ventures. “The way in which anchor traders can’t promote shares for a month after the IPO itemizing, there must be some timeline restriction of as much as 6 months for the QIBs too,” Parashar mentioned.
The rise of OFS
One other regarding development in recent times is the spike in supply on the market (OFS) within the IPO market as in comparison with makes an attempt to boost recent capital. For example, the 63 IPOs in 2021 have collected ₹43,328 crore in recent capital, in comparison with ₹75,394 crore in supply on the market. An OFS is when an present shareholder sells their holding in an organization. The cash thus raised goes to the non-public coffers of these traders. Alternatively, when an organization raises recent capital, it’s promoting new shares. The cash raised can be utilized in increasing the enterprise, mergers and acquisitions or go in direction of repaying debt.
Pranav Haldea, managing director, PRIME Database Group, says that the OFS route will not be essentially as dangerous as it’s being made out to be. “It is part of any maturing capital market ecosystem. It is just honest for PE (non-public fairness) and VC (enterprise capital) traders to exit after they assist the corporate attain a sure scale. They’ll additionally then redeploy the cash in newer ventures.”
“We should additionally not neglect the ‘90s and 2000s when greenfield corporations got here to the first market and raised solely recent capital. Most of them have vanished or shut store,” Haldea mentioned. What one should take a look at is, he provides, whether or not PE and VC traders are exiting absolutely or holding on to some portion. “If solely part of the stake is being diluted, it’s a constructive cue.”
In anticipation of the slew of massive listings deliberate for 2022, Sebi has determined to partially handle the OFS challenge. From April 2022 onwards, present shareholders who maintain 20% of the stake in a agency can’t supply greater than 50% of their shares in an IPO. These holding lower than 20% of pre-issue can’t promote greater than 10% of their shares.
In 2021, a number of corporations raised cash with out specifying a motive for it or for acquisition functions with out figuring out the goal. The brand new norms mandate that the quantity—meant for unidentified acquisitions—shall not exceed 25% of the quantity being raised. Together, the quantity for such unidentified acquisitions and the “normal company function” shall not exceed 35% of the overall quantity being raised.
RBI’s magic wand
The RBI had already began to tighten a number of the present guidelines earlier than Sebi obtained into the act. The banking regulator laid out in October that non-banking finance corporations can’t lend greater than ₹1 crore to traders in search of to purchase shares in IPOs from 1 April. The transfer is predicted to cut back the variety of oversubscriptions within the HNI class.
“This can be a very constructive change that can make the IPO market way more environment friendly… higher worth discovery will occur,” Kejriwal mentioned. “Typically, it’s seen that essentially the most subscribed IPOs can have nearly 700-800 massive traders. The curb on lending will lower the unreal demand. This may reasonable the demand amongst retail traders too, who (typically) get influenced because of the oversubscription by HNIs,” he added.
With the unreal froth gone, IPOs should be bought on benefit and fundamentals, come April 2022.
Whereas a number of the new regulation will certainly rework the IPO area in constructive methods, a number of points stay unresolved. For example, many PE traders spend money on an organization by way of a particular function car (SPV). “In case you take a look at the DRHP (Draft Purple Herring Prospectus ), solely the SPV’s title is disclosed. The names of the PE traders are by no means disclosed. So, traders can’t join (the) dots,” Kejriwal mentioned.
For example, Sion Funding Holdings exited from CMS Data in the course of the latter’s IPO. Sion is an affiliate of Baring Non-public Fairness Asia. “You gained’t discover the title of Baring in (the) DRHP which rings a bell,” Kejriwal added. “Why can’t Sebi make disclosure of the title of (the) major PE investor obligatory? The observe file of a PE investor ought to (additionally) be disclosed within the DRHP.”
Extra readability can be wanted on how an organization’s financials are disclosed within the DRHP, mentioned Vikas Bagaria, accomplice, Deloitte India.
Extra disclosures are wanted within the mild of covid-19 too. Present Sebi guidelines mandate corporations to reveal the earlier three years’ monetary statements within the IPO doc. Most corporations which introduced their IPOs in current months put in a disclaimer about how historic figures aren’t comparable resulting from covid-19 slowdown. “Three-year time (for monetary statements) is a considerably shorter interval to analyse the efficiency of an organization, contemplating covid. What’s it that stops promoters to share extra info? We want extra disclosures to make an knowledgeable name on the IPOs,” mentioned Kejriwal.
Whereas regulatory norms and disclosure necessities preserve evolving, what stays considerably fixed is the revolving IPO cycle. Knowledge present that each file IPO fundraising 12 months is adopted by a bear market that brings with it a lull in main issuances. That historic development requires added warning in 2022.
A number of corporations are anticipated to line up their IPOs within the subsequent three months earlier than the brand new, extra stringent guidelines kick in. LIC’s IPO, although, will exemplify the second of reality. Will the historical past of underperformance of massive IPOs repeat itself? Buyers clearly have some laborious calls to make within the months forward.
Supply: Live Mint