Analyzing India’s prosperous IPO Year of 2021
By Hitansh Tanna
Introduction
In 2021, 11 Indian start-ups — EaseMyTrip, Nazara, Zomato, CarTrade, Freshworks, Nykaa, Fino, Policybazaar, Paytm, RateGain and MapMyIndia — went public. Overall, these 11 start-ups raised over $7.36 Bn through the public markets through their IPOs. The median amount for IPO fundraise in 2021 was $409 Mn, with an average of $669 Mn raised through stock market listings.
What’s behind the recent start-up IPO push?
The Securities and Exchange Board of India (SEBI) has relaxed several norms to make it easier for start-ups to get listed on Indian exchanges. Earlier this year, SEBI reduced the time that early-stage investors need to hold 25 % of the pre-issue capital to one year from two years earlier. SEBI also amended regulations that previously barred start-ups that are going public from making discretionary allotments to allow start-ups to allocate up to 60% of the issue size of the IPO to an eligible investor subject to a lock-in period of 30 days on such shares.
The main clue lies in Angel Broking’s Q2 FY22 investor presentation, which states that the average age of a new Demat account holder is now 29, down from 31. Younger people are more likely to invest in tech-led firms.
Who are these IPOs benefitting?
For investors, initial public offerings (IPOs) are an instrument to clock quick gains — a lottery of sorts. You invest a certain sum anticipating significant returns in just seven days, assuming you get the shares you applied for. The current record subscriptions have substantiated this in IPOs in India. Think of it as a virtuous cycle; when the market sees investors making gains in IPOs, many more participants apply, leading to massive oversubscription. This, in turn causes even more FOMO (fear of missing out), leading to hefty premiums on listing day.
What is the impact of these IPOs on the start-up ecosystem?
The ecosystem saw a two-fold gain in cumulative valuation from 2020 to 2021, with an estimated $320 — $330 billion. Last year, 260 corporates engaged with the start-up community, up from 170 in 2020. Some 175 corporates invested in start-ups in 2021, with 52% being MNCs.India witnessed a vast IPO boom last year, indicating that the Indian start-ups have the potential to be accepted both by retail and institutional investors. Investors from all around the globe now have their eye on the Indian start-up ecosystem because the IPO presents a viable option for investors.
The IPO of Zomato indicated that even though this unicorn was loss-making, there was an absence of liquidity in it. The current scenario of India is proving to be a prosperous period for the Indian start-ups, and the companies are well-utilizing the opportunities provided to it. India has successfully marked its position globally as the third-largest tech start-up hub.
Will the trend of heavy IPOs continue in the future?
While there is still a long way to go before most start-ups achieve profitability and justify their high valuations, the successful listings of Zomato, Nykaa, Policybazaar have become guiding stars for more than two dozen start-ups that are about to IPO in 2022 and 2023. The list includes Indian giants such as Delhivery, BYJU’S, PharmEasy, Ola, OYO, Swiggy, Flipkart etc. With this cream of the ecosystem looking to go public, the next couple of years will be the biggest litmus test for Indian start-ups.
One can stay bullish on the trend and hope for it to continue as India has also attracted more attention from top global investors this year due to the crackdown of tech firms in China, where authorities have imposed sweeping curbs on private enterprises that have eaten into share prices and triggered concerns about future growth.
Key drivers that propelled India’s IPO market are new-age technology start-ups, extended low-interest-rate environment, strong retail participation, and the Indian growth story. Of the amount raised through IPOs, a substantial part ( ₹75,736 crores) was towards Offer for Sale (OFS), which is a matter of concern. To address these concerns, the market regulator, the SEBI has introduced some reforms recently, including a cap on OFS by existing shareholders and barring the use of IPO amount for acquisition unless the target is identified in the prospectus.
15 companies raised resources through 100% OFS route, while the issue size of 49 companies had more than 50% of the OFS component.
But there’s a catch!
Out of all IPOs that got magnificently listed in 2021, Paytm, which was supposed to raise more than 18000 Cr, got listed for a discount and barely reached its offer price again. It turned out to be a flop show. It was overpriced, and it required investors to make growth assumptions well into the future for a business model that has not been firmly established.
Author’s Insights
Tech is no longer a niche vertical. Everything we do in our lives is touched by tech. That is why Zomato, which is loss-making, could go public because of its growth and moat. For the start-up ecosystem, the current flurry of IPOs has a vital element of cascading effect as the early investors (like my father and me, and many more retail investors) get good money upon exit, which can be redeployed in the next round of promising start-ups.
The Indian market in itself is a generous one which is a win-win situation for the investor and the company, and I see this trend being carried forward in the upcoming few years.