IPOs: India vs the United States
There are record numbers of Indian IPOs occurring this year in India, from tech to distillers. For perspective, the highest number of IPOs in India ever was in 2007 with 108 (though 4 failed). In total, the companies raised $4B (Rs. 340B). The most ever raised was in 2021 with 63 IPOs raising $14B or Rs. 1.2T. So far there have been 35 completed IPOs raising just under $4B in 2024, with many more including Hyundai’s $2.5B landmark IPO to be completed.
There are a number of reasons for why there has been an uptick. Private equity and venture capital see going public as a great exit since they can leverage high retail participation. Fundamentals led by the government (infrastructure, digital, and manufacturing investment) plus steady consumer spending have made India the fastest-growing G20 nation.
While overall an IPO is comparable from country to country (a company sells a part of its equity in shares to the general public), there are key differences between the US and India.
Allocation of initial shares: in India, there are far more retail investors involved with IPOs compared to the US, where traditionally investment banks dish shares to institutional investors. Additionally, during the allocation phase of an IPO in India, initial anchor investors (an institutional investor that buys significant amounts of pre-IPO shares) are pre-chosen by the bank. This is compared to the US where the going public company has far more choice with the investors who initially invest, mostly being large banks.
Volatility: The US stock market has shown returns as high as India’s with lower volatility, driven by many of India’s larger stocks being dependent on government contracts and investment along with high long-term economic growth, to maintain valuations as a growth company. Infrastructure sector stocks like Adani Group or Tata Group are prime examples.
But why are Indian companies going to the US in droves for IPOs and seed funding? Varying governance standards make it difficult to undergo the process specifically for the shareholder rights that the Securities and Exchange Board of India (SEBI) set. This includes coming up with several types of KPIs from the past 3 years as disclosure to retail and institutional backers. The aforementioned volatility also drives larger companies away as small caps, like Sona Machinery, routinely rise 300% but turn negative all within a single day of trading. Ultimately, the RBI and private lenders like Axis Bank have stepped in to limit options trading and clamp down on large price swings with trading stoppages.
Still, many foreign and domestic companies choose to IPO in India for a myriad of reasons. Frothy Indian markets lead to rich valuations, with the overall market trading at 21x P/E comparable to the US and higher than most emerging market economies. Mutual funds in India have been seeing more than $2B (Rs. 166B) in monthly inflows due to investment plans, with most choosing equities over credit or commercial paper. India also has major shareholders being forced to act as ‘promoters’ to parlay information and grow awareness of the company - promoters, between 2021 and 2023, were responsible for $9.8B (Rs. 814B) of share sales. Add strong fundamentals and an expectation that the BJP will continue advancing growth, and most companies see promise in advancing valuations and raising capital in India.
Many Indian companies also choose to IPO in both Indian and U.S. stock markets. Infosys, an IT company, was listed on the National Stock Exchange of India (NSE) in 1993. In 2012, it conducted a secondary offering by through the American Depository Share Program, which issued certificates representing foreign shares to trade in a U.S. stock market. Foreign shares traded in U.S. markets are known as American Depositary Receipts (ADRs). These can be bought and sold by investors just like any other U.S. share. ADRs enable the listing company to bypass regulations on foreign investors in Indian markets.
