THE 148 INITIAL PUBLIC OFFERINGS (IPOs) from 2021 till mid-November 2023 collectively raised about ₹2.32 lakh crore. Another slew of shares of these newly minted IPOs, worth about $20 billion (₹1.6 lakh crore) is likely to hit the market by March 2024.

A November report by brokerage Nuvama highlights an impending offloading of approximately $20 billion of shares held by anchor and pre-IPO investors, as the lock-in period for these shares concludes over the next three months.

It particularly applies to companies that went public in the last two years, where anchor and pre-IPO investors, including promoters, are facing lock-in expiries. Under listing norms, pre-IPO investors are subjected to a six-month lock-in period. Anchor investors can sell 50% of their shares a month post IPO, with the remaining 50% available for sale after three months.

While it is not mandatory for anchor and pre-IPO investors to sell their shares after lock-in expires, these shareholders may have to bear the cost of locked-in wealth if the market is not conducive to profitable sale of bulk shares held by them.

Pitfalls Around Lock-in Expiry

The IPOs of Nykaa and Zomato garnered substantial investor interest, leading to their listing at a significant premium over their issue prices. However, just before the expiry of the lock-in period for anchor and pre-IPO investors, these shares experienced a downward correction. Nykaa was listed at a premium of almost 80% over its issue price of ₹1,125. But just before the lock-in expiry of one year for pre-IPO investors, the share tumbled below its issue price and has not recovered since.

Others such as Cartrade, Paytm and LIC have not even been able to touch their issue price since launch.

All these IPOs had a marketing blitzkrieg before they launched. Nykaa, for instance, spent ₹121 crore on marketing and advertising during July-September 2021, just before its IPO, while making a profit of about ₹62 crore in FY21. It reduced to about ₹41 crore in FY22.

The listing price of many IPOs may have been driven by narratives rather than fundamental analysis. Sapphire Foods, which listed at a premium of about 15% to its issue price of ₹1,180, also experienced a decline in share price around May 2022, six months from its IPO launch. This was also the time when the lock-in period of pre-IPO investors expired. The share price was trending much lower than its issue price till August 2022, when it started recovering. This could indicate that fundamentally lucrative stocks are likely to experience price dips when there is an increase in supply of shares.

In case of big IPOs such as LIC and Paytm, which have failed to even touch their issue price, the trend could indicate the inability of the Indian market to digest gigantic influx of share supply of a company at once.

Current Consumption Pattern

In September 2023, there were 12.96 crore active demat accounts, out of which 12.86 crore belonged to resident Indian individuals. The rest belonged to mutual funds, corporates, clearing members, banks, trusts, FIIs, FIs, NRIs, and others. The total value of equities held by the entire gamut of demat account holders was ₹339 lakh crore in September 2023, according to data released by NSDL and CDSL.

In August 2023, the ADT (average daily transaction) in cash segment was ₹76,500 crore, while the ADT in equity derivatives was ₹1.7 lakh crore, more than double that of delivery based trades. By October 2023, equity derivatives, which include indices such as Nifty, Bank Nifty, Financial Nifty etc, accounted for a staggering 99.6% of Indian stock market volumes, totalling over $4.3 trillion, or about ₹344 lakh crore per day. This means that about ₹342 lakh crore (99.6% of trading volume) of equity derivatives trading happened within a day in October 2023. This is about ₹4 lakh crore more than the entire value of equity held by all demat account holders in September 2023.

The Indian stock market is being driven by equity derivatives rather than delivery based buying in cash. This is evident from the trend in average money raised by IPOs over the past few years. In 2021, 65 new companies raised ₹1.31 lakh crore at an average of ₹2,022 crore. In 2022, 41 IPOs raised ₹65,000 crore at an average of ₹1,567 crore; while in 2023, till November 7, there have been 42 IPOs which raised ₹36,611 crore, an average of ₹859.1 crore.

The skew between delivery based stock buying and Futures and Options (F&O) trading does not bode well for any upcoming IPO or bulk offloading of shares of newly listed entities. Of the 4,000-plus stocks listed in the Indian stock market, only 193 are available for F&O or derivatives trading. Even within derivatives, 98% of derivatives volumes are contributed by trading on indices such as Nifty or Bank Nifty.

Such trends indicate that players in the Indian stock market are keen to gamble on trends rather than on value-based investing. When trends drive the market, it is very probable that marketing gimmicks, rumours, and hype wield much more influence on stock prices than financial rationales and fundamental principles.

In such a scenario, it will be quite difficult to offload lock-in shares of an IPO that soared high on trends and hype. This may be the litmus test for stocks’ resilience and fundamental appeal, because unlike IPO launch, lock-in expiry is generally not backed by a marketing campaign.

The Impending Stock Avalanche

According to Nuvama, the bigger chunks of stocks that are in for one month to six months’ lock-in expiry are of Utkarsh Small Finance (663 million shares), SBFC Finance (647.8 million), TVS Supply Chain (281.1 million), Concord Biotech (63 million), JSW Infra (53 million), Senco Gold (46.7 million), Yatharth Hospital (46 million), Cyient DLM (41 million), HMA Agro Industries (31.8 million), Netweb Tech (31.3 million), Ideaforge (26.5 million), Samhi Hotels (24.5 million) and Yatra Online (12.3 million). And then there are about 20 more companies with less than five million shares each to offload.

The companies that are in one-year lock-in expiry are Fusion MicroFinance with potential 48.5 million shares to offload, Kaynes Technology India with 25.3 million, and Dharmaj Crop Guard with 16.4 million shares.

Those that are in the 1.5 years and two years and beyond lock-in expiry are Indian Railway Fin. Corp. (2,614 million shares), LIC (1,265 million), Mazagaon Dock (40.3 million), Happiest Minds (29.4 million), Aether Industries (24.9 million), eMudhra (15.6 million), Chemcon Speciality (7.3 million), Ethos (4.7 million) and Star Health (2.5 million).

While the onslaught of share supply may be detrimental for share prices, it may be an opportunity for serious investors to collect gems at a lower price. The current rally in the market has made many old time favourite stocks reach a premium. Building a long-term portfolio of only these stocks may reduce profitability of the overall portfolio. Adding relatively obscure but valuable companies to one’s portfolio may yield much better returns.

Not All Gloomy?

So, will the shareholders of out of lock-in stocks face losses?

According to Abhilash Pagaria, analyst, Nuvama, who wrote the report, “pre-IPO investors have a lock-in expiry of six months. Primarily, these investors sell shares through block deals (at a pre-decided rate) and rarely in the secondary market.”

The crux of the matter is that ₹1.6 lakh crore worth of new shares that are ripe for hitting the market are either going to change hands through block deals, or current shareholders will keep holding on to them, or these stocks will hit the open market to face the judgement of the average investor.

The ₹18,300 crore Paytm IPO raised nearly half of its IPO money from giants such as BlackRock, Canada Pension Plan Investment Board & sovereign wealth funds of Singapore & Abu Dhabi, who came in as anchor investors. Since Paytm shares have not yet touched their issue price, it is not clear whether these investors bore losses to shed their stocks or have been holding on to them for the past two years in anticipation of future gains.

However, all such investments may not end up in vain.

For instance, the ₹858-crore Kaynes Technology’s IPO shares were listed at a 32% premium over their issue price of ₹587. Even its 52-week low has been far above its issue price and the stock seems impervious to any dips around lock-in expiries. It will be interesting to see how the potential offload of 25.3 million shares affects the stock price.

Similarly, Fusion MicroFinance IPO was listed at ₹360, within its IPO price band of ₹350 to ₹368. Since then, the stock has seen a slight dip around its one-month lock-in expiry, but it recovered quickly and has seen a steady growth even through its three and six month lock-in expiries. Currently, its share price is more than 60% higher than its issue price. The company is weathering a potential offload of 48.5 million shares currently.

On the other hand, Dharmaj Crop Guard’s IPO was listed at 12% premium over its issue price of ₹237 in December 2022. However, the stock price started falling even before its one-month lock-in expiry, and reached its issue price level only around mid-October 2023. The stock has not been able to touch its listing price yet.

The dichotomy of the resilient and hollow stocks will be visible with the swelling supply of their shares. However, even the stronger ones may be negatively affected, albeit for a shorter duration, as the trending dynamics of the Indian market has not been conducive to delivery buying of late.

While there is a possibility of many share prices sliding or many institutional or HNI investors bearing the cost of inflated issue prices, the influx of ₹1.6 lakh crore worth of shares may help the Indian stock market shake out of the venture capitalist avatar that it seemed to be donning for many IPOs now. This may be the time that stock market players realise that a VC’s game is different from stock-market investing and start paying more attention to fundamentals rather than being driven by pitches of companies aspiring to go public.

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