Blog by- Anuj Vishwakarma
Introduction-
Initial Public Offering trends made a big surge in the Indian Startup Setup as more than 45 startups initiate for their IPOs this year. The total money raised in IPOs this year has reached a mark of $10 billion, surpassing the money raised in the last three years together. Paytm, the country’s famous digital payment company steals the limelight this month with its Rs 18,300 crore IPO- the biggest-ever initial public offering by an Indian company. Earlier this year, food aggregator Zomato and cosmetics retailer startup Nyka caught the hype when both startups received their whole offering on day one only and became fully subscribed. Other major IPOs listed this year include insurance-tech company Policy Bazaar and a health care startup Pharm Easy, and both are receiving excellent bids at the stock market.
What exactly is an IPO?
An initial public offering is a process through which a private company converts itself into a public company by offering its shares to the public in the stock market. The main idea behind an initial public offering is to raise capital for the company through public investments. Private companies list shares of the company in the stock market and get a fair worth in return for the issued shares. IPO is generally a tool for private investors to obtain gains from their investment, as IPO includes a share premium for the present private investors.
IPOs are instrumental in boosting the development of companies and startups. The value of the company increases as its capital increases. When a private company turns into a public company through IPO, it has to adhere to the public scrutiny which is helpful in establishing the accountability and reliability of the company. This in turn, often leads to a boost in sales of the company. However, IPOs are expensive and on top of it, it is expensive to maintain a public company.
IPOs are executed after a company completes its pre-marketing. It is mandatory for the companies seeking IPOs to be approved by the Securities and Exchange Board of India (SEBI) before the date of execution of the IPOs in the stock market. Generally, a company worth $1 billion (known as ‘unicorn status’) or more is qualified to receive the approval. However, the same is subjected to the impact and profitability potentials of the company. The shares of a company are priced through underwriters with due diligence.
The recent surge-
Indian startup system saw a swift move of companies from various fields towards the execution of IPOs. The surge is not only limited to the initiation of the IPOs but also results in the success of the companies in gaining capital. FSN E-Commerce Ventures (Nyka), which had an issuing size of Rs 5352 crores for the bidding, was the show-stellar after being subscribed more than 82 times at the end of its final day of bidding. The profit-making startup is listed at a 79.4% premium to its IPO price per share of Rs 1,125. Food aggregator startup Zomato was another success story. It was subscribed 38 times at the end of its final day of bidding.
Among many other IPOs during the whole year, the one which held the most limelight was the biggest ever IPO by an Indian company (fourth biggest globally by a fintech company) by Paytm. One97 Communications, the parent company of Paytm, marking below the expectations, was subscribed 1.89 times at the end of its final day of bidding. It is the only Indian startup this year, till now, to be discounted, with the listing at -9%. The startup expected itself to be valued at around $20 billion from its last private valuation of $16 billion, at the end of its bidding. However, the value declined to $13 billion. Though, Paytm received strong leads from international investors like BlackRock Inc. and SoftBank Group Corps.
The reason for Paytm’s underachievement has been credited to the long-term prospect of the startup. As per many investment experts, unlike most of the other companies executing IPOs this year, Paytm has a long-run prospect and short-term investment in the same is highly risky due to the big size of its issuance shares. “In Paytm’s case, where there is the strength of the network effects — it’s the largest digital payments platform from a merchant’s perspective — it has a long runway to capitalize on that and hopefully generate some profits along the way,” The words of Rakhi Prasad, an investment manager.
What is the reason behind the recent surge?
Among the reasons behind the surge noticed in IPOs in India, a key one is a sense of major interest in Indian firms (especially, Indian tech startups) by the international institutional investors. Over the past year, there has been a huge increase in the interest shown by the global institutional investors in Indian firms, mainly due to the good prospect of profits in the demanding Indian market. The covid-19 pandemic has also caused a surge in IPO activities. Companies are looking to secure enough capital to make a strong recovery from the ongoing pandemic. The surge is also due to the continuing cycle of success. People are becoming more inclined towards IPOs due to the fear of missing out. When the market witnessed an initial surge, more people join seeing the market making profits in IPOs.
Conclusion-
As the year comes to its end, it is being marked as a significant year for the companies and startups in terms of IPOs. The year has landed with one of the highest shares ever issued through IPOs in India. More than 50 IPOs have already been held this year with a month to spare. New-age companies were able to make a big mark with some stellar performances like retail cosmetics startup Nykaa and food aggregator startup Zomato. The future of IPOs in India poses a bright picture for the upcoming year with many big companies like Byju’s, LIC, and Ola already announcing their IPOs for 2022. Performance-wise also, the year implicates a bright picture for the companies and investors with most companies making successful runs at their IPO biddings this year. However, the performance of Paytm at the IPO bid has raised doubts among the companies and investors. There is a need among the investors to put a distinction between the startups based on their business field and model and choose their targets wisely. As per many research analysts, the companies and the investors need to acquire a cautious and sustainable approach while dealing with the IPO to make a successful run.
References-