A study by markets regulator Sebi highlighted flipping behaviour among investors in the initial share-sale market with investors (excluding anchor) selling 54% of IPO shares allotted to them by value within a week.
In light of the increasing participation of retail investors and the heightened oversubscription in recent IPOs, the Securities and Exchange Board of India (Sebi) conducted an in-depth study to analyze investor behaviour in main-board IPOs.
The study found a strong disposition effect (tendency to prematurely sell assets that have made financial gains) with investors showing a greater propensity to sell IPO shares that posted positive listing gains, compared to those that listed at a loss.
The study encompasses data from 144 IPOs listed between April 2021 and December 2023.
During the study period, 144 IPOs collectively raised a total of Rs 2.13 lakh crore. Notably, 65% of the total issue size was Offer for Sale (OFS), through which the pre-existing shareholder sold their shares, instead of the company raising the money.
According to the study, “About 54% of IPO shares (in value terms) allotted to investors (excluding anchor investors) were sold within a week from listing”.
Individual investors sold 50.2% of shares (in value terms) allotted to them within a week from listing, non-institutional investors (NIIs) offloaded 63.3% of shares and retail investors sold 42.7% of shares.
Interestingly, individual investors sold 70% of shares by value within a year.
On the other hand, mutual funds tend to invest for a longer period in IPO shares, whereas banks tend to sell swiftly. Mutual funds sold about 3.3% of the allotted value within a week, compared to 79.8% for banks.
The study highlighted that returns influenced the selling behaviour as individual investors sold 67.6% of the shares by value within a week when IPO returns exceeded 20% within a week. In contrast, only 23.3% of shares by value were sold when returns were negative.
Regarding geography, retail investors from Gujarat received 39.3% of the allotment in the category, followed by Maharashtra (13.5%), and Rajasthan (10.5%).
The increase in IPO participation could be derived from growth in demat accounts. Notably, nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during the post-COVID period — 2021-2023.
Following Sebi’s policy interventions regarding the NII share allotment process and RBI’s guidelines on IPO financing by NBFCs in April 2022, the study observed a reduction in the over-subscription under the NII category from 38 times to 17 times.
Also, it noted a decline in the number of IPO applications by “big ticket NII Investors” — applying for more than Rs 1 crore in IPOs — to 20 applications per IPO in the post-policy period (April 2022-December 2023) from around 626 applications per IPO in pre-policy period (April 2021-March 2022).
Additionally, it found a reduction in the exit of big-ticket NII Investors to about 25% within a week during April 22-December 23 from about 70% within a week during April 21-March 22.
In April 2022, Sebi made changes in share allotment methodology from a pro-rata basis to a lottery basis for the NII category and sub-divided NII category (15% quota) into small-NII (5% quota) and big-NII (10% quota) categories, while RBI introduced restrictions on IPO funding by NBFC upto Rs 1 crore per borrower.
(With agency inputs)
