IPO Flipping Continues
In the past, Samosa Capital has analyzed the domestic fervor behind Indian stocks leading to high valuations. Another aspect to consider is the high amount of capital flowing through initial public offerings, including new stocks with almost no right to be publicly issued. Reading any Indian newspaper reveals dozens of IPOs hundreds of times oversubscribed, with many companies asking for simply $2M receiving bids for over $10M. A motorcycle dealership looking for $1.4M of funding is oversubscribed by 400x.
While regulators and participants love the additional liquidity, why is this happening? And more importantly, what are the risks?
Reasoning
Domestic investors have been flipping their stocks to generate quick returns. According to SEBI’s analysis of 150 IPOs from 2021 to 2023, retail investors who invested less than $2,500 sold off 50% of their shares within a week of the IPO. High net worth investors, with investments over $2,500, sold off more than 60% during the same period.
However, retail investors and high-net-worth individuals typically get between 25% and 50% of the shares in an IPO. More profitable companies tend to attract more retail investors. Surprisingly, some non-anchor-qualified institutional buyers, such as insurance, pension, and mutual funds, quickly sold 65% of their shares within a week, likely trying to liquidate the profit from the post-IPO pop, while hedging risk exposure. However, the overall sell-off from QIBs was just 20%. This lower figure is because anchor investors — QIBs that buy huge amounts of capital during an IPO and are required to hold it for a lock-up period, make up around half of all the shares allotted to QIBs (about 50%), while non-anchor QIBs held about 15%.
Furthermore, foreign investors have been leaving Indian equities in droves due to high valuations and choppy markets. That being said, they continue to invest in IPOs. Foreign investors have recently dumped $3.4B worth of Indian stock but have moved half of that capital to Indian IPOs, trying to capture the same run-ups as domestic investors.
Of course, regulation is also not concrete. Lock-up periods for anchors are 90 days at most, compared to 180 usually in the US. SEBI and NSE requirements are more modest compared to other markets: investors must only have a total NAV of at least $750,000, be in operation for at least 3 years, and have an average operating profit of $1.25M for 3 years.
Risks
Investors are participating in a ‘greater fools theory’ hoping that someone will scoop up their shares for more than they bought it for — this speculative strategy has investors essentially saying, “I may be a fool for buying this, but I am sure I can find a greater fool to buy it off me.”
Major investors and QIBs are playing hot potato with Indian stocks — despite being responsible for the insurance and pension payouts for hundreds of millions, these institutions comfortably buy and sell high-risk fast-growing shares lacking strong fundamentals to sell quickly after a quick pop. In particular, banks are selling 80% of shares within a week. Everyone wants in, but no one wants to be the last investor holding the stock if/when the bubble pops.
