In the first half of 2024, India's IPO market has defied global trends, showcasing a remarkable contrast to the cooling IPO activity seen in major markets such as the US, Japan, and China. This divergence underscores India's burgeoning role as a powerhouse in the global IPO arena.
While the global IPO landscape experienced a downturn, with volumes dropping by 12% and proceeds declining by 16% year-over-year (YOY), India’s IPO market has been on a remarkable upswing. According to the EY Global IPO Trends Q2 2024 report, India's primary markets, including the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), have seen unprecedented activity. The fiscal year 2024 has already surpassed the entire capital raised through IPOs in 2023, with 76 mainboard IPOs recorded—an impressive 111% increase from the 36 listings in FY23. The fourth quarter of 2024 alone saw 21 mainboard IPOs, a significant surge compared to just 2 in the same period of the previous year. This remarkable rise can be attributed to a confluence of factors including substantial infrastructure investments, growth in manufacturing, steady consumer spending, and an influx of foreign capital as investors shift their focus away from China.
This surge is not just a statistical anomaly but reflects a broader trend of high liquidity and robust investor confidence in the Indian market. Since the lockdowns of 2020, India has seen 215 IPOs, with over 70% trading above their issue price as of July 2024. This trend is indicative of a financial bull market where companies are eager to capitalize on favorable conditions before the market environment potentially shifts.
Prashanth Tapse, Senior VP of Research at Mehta Equities Ltd., explains, "IPOs heat up in booming bull markets due to high liquidity and a strong secondary market driven by a robust domestic economy and high investor confidence." The current IPO frenzy in India parallels the high-stakes excitement depicted in financial dramas like "The Wolf of Wall Street" and the corporate intrigue seen in "Succession." Companies are driven to go public not only to raise significant capital but also to gain prestige and competitive advantage.
However, the IPO process is not without its challenges. While going public can offer substantial benefits, it also comes with notable drawbacks. The cost of equity is generally higher than that of debt, as equity involves no repayment but can lead to significant long-term costs. Regulatory compliance increases post-listing, requiring extensive disclosure of sensitive financial and operational information, which can be advantageous to competitors. Furthermore, the potential for losing control over the company is a serious concern. Companies risk hostile takeovers or increased influence from larger competitors as shares are traded openly on the market.
Since 2020, out of 215 IPOs, 158 have experienced gains, while 22 have closed below their IPO price. Conversely, 30 companies that initially listed below their IPO price have seen their shares rise above it. As of July 31, 2024, 172 IPOs are trading above their issue price, with an average listing gain of 26% for the retail sector and overall gains of around 119%.
The ongoing IPO boom in India is driven by a favorable economic environment, but market dynamics are constantly evolving. Prashant Tapse notes that the IPO fundraising cycle is closely tied to economic conditions. During a bull market, high valuations and strong investor enthusiasm encourage companies to go public. In contrast, adverse market conditions or bear phases can dampen IPO activity as companies face challenges in achieving favorable valuations.
Ultimately, while IPOs launched during a bull market may offer initial gains, long-term value is often realized by investors who conduct thorough research and are prepared to navigate market fluctuations. As the IPO landscape continues to evolve, both companies and investors must balance the immediate benefits of going public with the broader implications for long-term growth and stability.
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