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Listing Gains in IPOs- Insights into Investor Behavior

Listing Gains in IPOs- Insights into Investor Behaviour

SEBI conducted a comprehensive study analyzing investor behavior in Initial Public Offerings (IPOs) during the period from April 2021 to December 2023.

The report provides insights into the exit patterns of various investor categories, the influence of policy changes, and key demographic trends.

The study focuses on behavioral patterns, investor returns, and the effects of market dynamics on IPO performance.

Findings

High Exit Rates Within the First Week

  • Around 54% of IPO shares (by value) allotted to investors, excluding anchor investors, were sold within a week of listing.
  • Individual investors sold 50.2% of their shares (by value) within the first week, with Non-Institutional Investors (NIIs) selling 63.3% and retail investors selling 42.7%.
  • Institutional investors, including Mutual Funds, had lower exit rates, with only 3.3% of shares sold by Mutual Funds within the first week, while 79.8% of shares held by banks were sold quickly.

Disposition Effect

  • Investors showed a “disposition effect,” where they were more likely to sell IPO shares when they experienced positive listing gains.
  • For IPOs that yielded more than 20% gains within a week, individual investors sold 67.6% of their shares, compared to 23.3% when returns were negative.
  • NIIs were even more responsive to gains, selling 79.1% of their shares when the IPO delivered over 20% returns within the first week.

Geographical and Demographic Distribution

  • Gujarat had the highest concentration of retail investors, accounting for 39.3% of all retail IPO allotments, followed by Maharashtra (13.5%) and Rajasthan (10.5%).
  • A significant portion of IPO investors had opened their Demat accounts post-COVID, with almost 50% of all IPO accounts opened between 2021 and 2023.

Impact of SEBI and RBI Policy Changes

  • SEBI made significant changes in April 2022, including a lottery-based share allotment for NIIs and the subdivision of the NII category into small NIIs (s-NIIs) and big NIIs (b-NIIs).
  • The RBI imposed restrictions on IPO funding by NBFCs, limiting funding to ₹1 crore per borrower, which significantly impacted high-value NII applications.
  • Following these changes, the number of “big-ticket” NII applications (worth more than ₹1 crore) dropped sharply from 626 per IPO before the changes to just 20 per IPO after the changes.
  • The level of oversubscription in the NII category decreased from 38 times before the changes to 17 times after.

Exit Patterns by Different Investor Categories

  • Retail investors exited 42.7% of their shares in value terms within a week of listing, while NIIs exited 63.3% and QIBs (Qualified Institutional Buyers) exited 19.5%.
  • Exclusive QIBs (non-anchor QIBs) showed faster exits, with 65.4% of shares sold within a week and 87.8% within a year.
  • The introduction of longer lock-in periods for anchor investors reduced their exit rates significantly, with exits dropping by 10.4 percentage points after 90 days compared to the period before the policy change.

IPO Performance and Investor Behavior

  • Of the 144 IPOs analyzed during the study period, 75% delivered positive returns, and 26 IPOs delivered over 50% listing gains on the day of listing.
  • There was a positive correlation between listing gains and the percentage of shares sold by individual and institutional investors.
  • Higher listing gains resulted in faster exits.

Off-Market Transfers

  • 2.7% of the total shares allotted to IPO shareholders were transferred off-market within three months, with the majority of these transfers being to family or self-accounts.

Post-Listing Shareholding Trends

  • The study found a significant reduction in the number of shareholders within a week of listing, followed by relative stability in the subsequent months.
  • Foreign Portfolio Investors (FPIs) reduced their shareholdings by 1.3 percentage points over the first year post-listing, while Mutual Funds increased their holdings by 1.1 percentage points during the same period.

The Gist

  • The SEBI study highlights the aggressive exit behavior of retail and NII investors within the first week of listing, driven by positive listing gains.
  • Policy changes by SEBI and the RBI have notably impacted the behavior of large NII investors, reducing oversubscription levels and decreasing the influence of “big-ticket” investors.
  • This study underscores the dynamic nature of investor behavior in the IPO market and the need for policy measures to ensure a balanced and fair market environment.