SEBI Study - Analysis of Investor Behavior in Initial Public Offerings (IPOs)

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1. Overview and Objective of the Study

The study aims to analyze the behavior of investors in IPOs, specifically focusing on their exit patterns, the impact of policy changes by SEBI and RBI, and the broader market trends observed during IPOs listed from FY22 to FY24 (April 2021 to December 2023). The data was collected from 144 IPOs during this period.

2. Key Findings and Patterns

Flipping Behavior:

  • High Exit Rates: About 54% of IPO shares (excluding anchor investors) were sold within a week of listing.
  • Investor Categories:
    • Individual Investors: Sold 50.2% of their allotted shares within a week.
    • Non-Institutional Investors (NIIs): Exited 63.3% within a week.
    • Retail Investors: Exited 42.7% within a week.
    • Mutual Funds: Only sold 3.3% within a week, indicating a longer-term holding strategy.
    • Banks: Exited 79.8% within a week, showing a preference for quick liquidation.

Disposition Effect:

  • Propensity to Sell on Gains: Investors showed a tendency to sell IPO shares with positive listing gains. For instance:
    • Individual investors sold 67.6% of shares when returns exceeded 20%.
    • In cases of negative returns, only 23.3% of shares were sold within the same period.

Geographical Distribution:

  • Concentration in Specific States: 39.3% of retail investors were from Gujarat, followed by Maharashtra (13.5%) and Rajasthan (10.5%). This indicates regional dominance in retail participation.

3. Impact of Policy Changes by SEBI and RBI (April 2022)

SEBI Policy Changes:

  • Lottery-Based Allotment for NIIs: Replaced the pro-rata method, reducing the advantage of larger applications in oversubscription scenarios.
  • Subdivision of NII Category: The NII category was split into small-NIIs (₹2 lakh - ₹10 lakh applications) and big-NIIs (>₹10 lakh), redistributing the 15% reservation in IPO allotments between these subgroups.
  • Anchor Investor Lock-In Extension: The lock-in for anchor investors was extended to 90 days for 50% of their shares, up from the initial 30 days for all shares.

RBI Policy Changes:

  • Cap on IPO Funding: Restricted IPO funding by Non-Banking Financial Companies (NBFCs) to ₹1 crore per borrower, aiming to curb excessive leverage in IPO applications.

Impact Observations Post-Policy Changes:

  • Reduction in Oversubscription: Oversubscription in the NII category dropped from 38 times to 17 times post-policy changes.
  • Decline in Big Ticket NII Applications: High-value applications (over ₹1 crore) significantly decreased, from an average of 626 applications per IPO before policy changes to 20 applications afterward.
  • Lower Exit Rates for Big Ticket Investors: Exit rates for large NIIs dropped sharply from 70% within a week before the policy changes to 25% post-implementation.

4. Exit Patterns by Investor Categories

By Allotment Categories:

  • Retail: 42.7% exit within a week.
  • NII: 63.3% exit within a week.
  • QIB (Qualified Institutional Buyers): 19.5% exit within a week, with further breakdowns showing Exclusive QIBs (non-anchor) exiting faster (65.4% within a week).

By Holding Categories:

  • Foreign Portfolio Investors (FPIs): Held a significant portion, but exit rates varied based on listing gains and market conditions.
  • Banks: Exited most swiftly, reflecting a preference for quick returns.

5. Correlation with IPO Performance

  • Higher Exits on Higher Gains: A strong correlation was noted between listing gains and exit rates. IPOs with first-week returns above 20% saw much higher exits from both retail and NII investors.
  • Impact of Subscription Levels: Higher subscription rates generally led to higher exits, particularly in cases of extreme oversubscription (greater than 100 times).

6. Brokers’ Concentration in IPO Market

  • Reduction Post-Policy: The concentration of top brokers in handling IPO transactions, particularly for NIIs, fell significantly after the policy changes. The top 5 brokers’ market share in NII allotments dropped from 58.1% to 21.1%.

7. Off-Market Transfers

  • Extent of Off-Market Transfers: IPO shares worth ₹5,300 crore (2.7% of total shares allotted) were transferred off-market within three months, with 95% of these transfers occurring to self or family accounts.

8. Changes in Shareholding Patterns Over One Year

  • Decline in Shareholder Numbers Post-Listing: There was a noticeable drop in the total number of shareholders immediately after listing, stabilizing after about a month.
  • Minor Shifts in Value Terms: FPIs saw a slight decline in their share (from 19.9% to 18.6%), while Mutual Funds increased their share from 2.1% to 3.2% over the year.

Conclusion

The study provides comprehensive insights into the behavior of various investor categories in IPOs, highlighting a significant inclination towards quick exits, particularly in favorable market conditions. The policy changes by SEBI and RBI have had a notable impact on investor behavior, particularly among NIIs, reducing both oversubscription rates and the influence of large applications. These findings underscore the evolving dynamics of the IPO market in response to regulatory interventions and market conditions.

This analysis captures the essence of investor behavior in the IPO market and the effects of recent policy changes, providing valuable insights for stakeholders in the financial markets.

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Those who buy and sell in the short term are called traders not investors :joy:. Most people are traders. Very few investors who actually buy and hold for a very long time.