IPO boom – Euphoria Or Coming Of Age Of the Indian Capital Market?

Is your company “Great,” These are exciting times for capital markets in India and around the globe. The economic dislocation triggered by the pandemic has reshaped economies. Many fast-growing companies, which were less susceptible to the impact of COVID-19, are changing the business narrative, including the IPO landscape. Boards, driven by investors’ enthusiasm, are determined to act fast and explore opportunities to go public. The pandemic has also prompted change within the existing IPO process, as potential investors can now connect virtually, in half the time. Many CFOs, who may have been wrestling with “when” to go public, now want to seize the opportunity and are now looking at “how soon”.

Vikas Bagaria This Indian IPO boom has occurred due to various factors, like record-breaking secondary market levels, positive investor sentiment, significant long-term investment capital, ease of investing in IPO’s (including funding), active institutional investors, less attractive investment alternatives, promising Indian IPO stories, and most importantly, a very alert and responsive regulator. A recent trend of listing day gains is also adding to the excitement.
Is there a risk?
While the sheer number of IPOs and their high valuations have created a sense of euphoria, we must pause and ask ourselves if something can go wrong, as it can. An IPO is by far the riskiest investment for an investor, and possibly the most expensive way of raising capital for a company. While direct retail participation is statutorily restricted to ten percent at the IPO stage for non-profit making, there is also indirect exposure through mutual funds and other institutional investment vehicles. Public interest here is clearly at stake and this places heightened responsibility on the IPO company. While investors may not seek a guarantee, they will demand accountability. Here are a few top line thoughts to consider:

- Sentiments are fragile and communication is important: It is necessary to establish effective, ongoing stakeholder communication to explain the basis for unconventional valuations.

- Educate investors about value: How do you define and monitor risk and success? What inputs, for instance, financial and non-financial key performance indicators that will explain progress?

- Strongly focus on governance, while maintaining speed and agility: Well-governed companies are as nimble as private enterprises.

- Attract the right kind of long-term investors: Over-subscription may be an indication of interest but if it’s from investors with short-term interests, you won’t be able to sustain the discovered price. Index investors, pension, and mutual funds help bring stability. You will need quality institutions backing you for the long term.

- IPO pricing: It is always difficult to determine the right price. Maximisation of the exit value should not be the objective. It isn’t a one-time event.

- Quarter-on-quarter pressure: The Indian investor community has matured on this. While earnings are still important, that isn’t the only parameter. Rather, focus on value building.

- Respect the customer: While data can be tempting, it is important to honour the unwritten code of conduct.

- Social impact is must: There is a huge cost associated with ignoring this rising consciousness.

The India unicorn club is growing larger with successful stories from sectors like Fintech, EdTech, healthcare, consumer, food delivery and mobility, e-commerce, and the rapidly growing software-as-a-service (SaaS). They are also accelerating the pace of digital adoption by gaining scale with innovative, and unique business models and are creating new growth opportunities. Attracting capital is no mean feat for them and they feature at the forefront of India’s start-up ecosystem. While the basis of their valuations seeks public validation, the promoter and investor pedigree should provide some confidence to the investors. As such, an IPO is not a full exit event for promoters or PE’s. They too are investors!

Is the capital market coming of age?
It was earlier believed that only certain overseas capital markets understand new-generation businesses and offer fair valuations. However, the current sentiment supporting tech-based IPOs in India is pointing towards newer times.

We have broken many glass ceilings over the years; from moving the needle on “Controller of Capital Issues” driven pricing, to building a book on price discovery, we have certainly come a long way. In the early days, businesses were largely promoter funded who leveraged bank or institutional financing. This cycle progressed, and now, ideas are backed by venture capital and private equity firms, indicating promoters’ willingness to share control. We now see promoter driven companies being professionally led and managed. Investors too, have become more patient and are willing to wait to see profits, moving away from the erstwhile mindset of only viewing profit-making companies as candidates for an IPO. The dilemma around “offer for sale” (OFS) versus primary funding has also been overcome, and quite a few recent IPOs, which have been subscribed 90 times over, have been pure OFS.

Interestingly, the quantum of oversubscription may not yet indicate the true depth of available liquidity here. These may be short-term flows, moving from one opportunity to another. Are we on the cusp of one such defining moment, with untested equity stories and their unconventional valuations entering the market?

In conclusion
VC/PEs will inevitably exit at some stage to support another emerging risk story. The true barometer of successful business story will always be the stock exchange. Public markets will determine success or failure, including the right valuation. Capital markets can only become deeper when you have diversity in the equity story and sectors. Volatility is required. Returns will only follow risk.

India is blessed. We have highly talented, young explorers out there to solve problems and an ever-responsive, vibrant consumer base. It also possesses well-crafted democratic credentials and institutional frameworks to attract and safeguard capital. Now, it’s the collective responsibility of all involved in the IPO supply-chain to play their role, and go beyond, to ensure that this isn’t just euphoric. Else, we would have lost an opportunity.