A fifth of active investors bet on IPOs as recent returns turn attractive

Average retail applications for July IPOs up 2x over 2020, 8x over 2019

Close to fifth of active stock market investors are placing bids in initial public offerings (IPOs), underpinning the buoyancy in the primary market.

Last week, the maiden offerings of Rolex Rings and Glenmark Life Sciences saw more than 3.5 million and 4 million retail applications respectively. To put the numbers in context, the average retail applications IPOs in 2019 was less than a million while last calendar it stood at 1.3 million, data provided by Prime Database shows.

The National Stock Exchange (NSE) had an active client base of around 22.4 million, at the end of June. There has been an 18 per cent increase in the active client base, which industry participants say is largely on account of investors wanting to participate in IPOs.

The spurt in application numbers has been a big confidence booster for companies wanting to go public. Paytm, PB Fintech, Nykaa and several others making a beeline to list. The IPO fund raising in 2021 is widely expected to surpass the 2017 record of Rs 67,147 crore. So far this year, 28 IPOs have raised Rs 42,000 crore.

The mouth-watering returns generated by recent listings is luring investors to place at least one bid in all IPOs, say industry players.

“Most of the IPOs that have come are giving handsome returns. It then becomes a short term return making instrument for customers. Second, the process for applying for an IPO has become extremely simple with UPI. The time taken by the company to get listed has been reduced because of the measures by the regulator and exchanges," said Prakarsh Gagdani, CEO,5Paisa.

The last four companies to list – Tatva Chitan, Zomato, Clean Science Technology, and GR Infra – have delivered returns between 65 per and 113 per cent on the listing day.

Experts said the primary and the secondary markets are complimenting each other at present. The buoyancy in the secondary market is providing the necessary valuation support for companies to launch their IPOs. On the other hand, the advent of new investors is boosting trading volumes in the secondary market. The share of individual retail investors in NSE’s cash market turnover has shot up from 39 per cent in FY20 to 45 per cent in FY21.

“The market has been strong, the volatility has been low, and we have had successful IPOs. Traditionally markets doing well leads to a higher number of IPOs coming to the market and a rise in applications. The retail interest keeps on the building because investors usually enter markets by investing in an IPO. Subsequently, they would trade in secondary markets,” said Prasanth Prabhakaran, MD & CEO, Yes Securities.

Industry players say the number of retail applications in IPOs will continue to increase till the time IPOs continue to clock good returns. Barring three, all of the 28 companies to list this year are currently trading above their issue price.

The spike in retail applications, however, has made IPO a game of lottery. For some of the highly-oversubscribed IPOs the probability of getting an allotment could be as low as one for every 20 applications.