Why Gujarat Leads IPO Purchases

A PEER-REVIEWED STUDY by the Securities and Exchange Board of India (SEBI) on initial public offerings (IPOs) between early 2021 and the end of 2023 highlights interesting trends in Indian stock markets where the sentiment remains bullish notwith­standing volatility and forecasts of corrections, even as stock launches attract a steady surge in retail investors. As always, Gujaratis tend to dominate such market activities, accounting for around 40 per cent participation in IPOs in retail as well as high net worth individual (HNI) segments.

SEBI released its most recent study, which put the spotlight on 144 IPOs listed between April 2021 and December 2023, this month. The country’s stock market regulator said in the report that the research was peer-reviewed by a group comprising academics, merchant bankers, brokers, investors, and asset managers. The SEBI report categorically demonstrates that most individuals who apply for IPOs target quick gains. Not surprisingly, the number of demat account holders, a prereq­uisite for possessing shares and securities in electronic format, crossed the 17-crore mark for the first time in August, backed by a total of 42.3 lakh new demat accounts opened in the month. According to Moneycontrol, India’s total demat accounts are now ninth in rank globally and the count exceeds the popula­tions of countries like Russia, Ethiopia, Mexico, and Japan.

Incidentally, a majority of retail investors who are part of the sample of the SEBI study—and who are enthused by the overall bullish sentiment—were from Gujarat, followed by Maharashtra and Rajas­than. The report elaborates, “With regard to the geographical spread of investors in IPOs, it was observed that about 70% of IPO investors were from the top four states: Gujarat, Maharashtra, Rajasthan, and Uttar Pradesh. The retail investors from Gujarat received 39.3% of the allot­ment in the retail category, followed by Maharashtra (13.5%), Rajasthan (10.5%).” Non-Institutional Inves­tors (NII)—who apply for more than ₹2 lakh worth of shares in a public issue—from Gujarat received about 42.3 per cent of the total allotment in that category.

Meanwhile, stock-trading company Zerodha’s founder Nithin Kamath, while mentioning the SEBI study, hailed the Gujaratis on X: “…IPO flipping [trading] in the Gujju genes.”

Several reports on data obtained from stock exchanges and other sources have routinely lapped up the Gujarati zeal for in­vestment and for making gains in the stock market, both in India and abroad. Within India, says a Times of India report that collated the June 2024 data from the National Stock Exchange, Gujarat has the highest percentage of active traders among registered investors, with 22.57 per cent of investors trading at least once. In terms of the number of active investors, Gujarat surpasses other states known for being gung-ho about stock markets and IPOs. According to another report, the 2024 financial year saw three crore unique investors participate in the market, with Gujarat seeing about 30 lakh unique investors during the period. Gujara­tis are indeed synonymous with Indian stock markets and have historically lent a pioneering touch to trading.

Fiscal year 2022 was “a historic year,” as the SEBI report de­scribes, for public equity issuances. Fund mobilisation through Main Board IPOs reached new highs, along with the listing of many new-generation, growth-oriented tech companies, the report highlights. In fiscal 2022 alone, a record amount of more than ₹1,10,000 crore was raised through 50 IPOs.

Notably, retail investors, meaning amateur ones, are ready to take huge risks and are undeterred by market requirements as regards minimum investment. They have aggressively encroached on what were once the preserve of HNIs, including IPOs of small and medium enterprises, as other sources confirm. In the 2020 fiscal year, while an average of only 408 individuals applied for each SME stock launch, in the current fiscal year, the average number of applicants has soared to 219,000 per offering, accord­ing to a recent news report.

Meanwhile, the latest SEBI report says that the key aim of the study is to measure the flipping behaviour of investors in the IPO market. “About 54% of IPO shares [in value terms] allotted to investors [excluding anchor investors] were sold within a week from list­ing. Individual investors sold 50.2% of shares [in value terms] allotted to them within a week from listing,” it goes on, adding that NIIs sold 63.3 per cent of shares by value.

On the other hand, mutual funds tend to invest for a longer period in IPO shares, whereas banks tend to sell swiftly, the study adds, emphasising that mutual funds sold about 3.3 per cent of the allotted value within a week compared to 79.8 per cent for banks.

Another aim of the study by SEBI was to observe post-policy change related to shares allotment to the NII segment. The report explains, “In April 2022, key policy measures were introduced by SEBI and RBI [The Reserve Bank of India], especially for the NII category [which includes corporates and high net worth individuals]. SEBI made changes in the share allotment method­ology from a pro-rata basis to a lottery basis for the NII category and subdivided the NII category [15% quota] into small-NII [5% quota] and big-NII [10% quota] categories, while RBI introduced restrictions on IPO funding by NBFC up to ₹1 crore per borrower.” Now, small NIIs are those who bid for above ₹2 lakh but below ₹10 lakh; big NIIs are those who apply for stocks worth over ₹10 lakh.

As a result of these policies, the IPO market saw a reduction in over-subscription under the NII category from 38 times to 17 times. The study states that about 37.7 per cent of the total IPO shares in the sample were allotted to FPIs (foreign portfolio in­vestment, a route for foreign investors to invest in Indian stock markets), followed by individuals (31.9 per cent), mutual funds (16 per cent), corporates (5.2 per cent), insurance and pension funds (3.8 per cent) and banks (3.6 per cent).

The report offers specifics, “When returns were high, exit by retail, NII, and QIB [Qualified Institutional Buyers] category investors was higher than their respective averages. The IPOs which witnessed a gain of more than 20% within a week [con­sidered very high return IPOs], witnessed NIIs exiting 79.1% of their shares within a week [compared to an average exit of 63.3%]. Similarly, retail investors exited 61.9% of shares when returns were very high [compared to an average exit of 42.7%].”

The SEBI report also discusses the impact of policy changes. It says, “The number of ‘big ticket’ NII investors has dropped from April 2022 onwards. Before April 2022, the average num­ber of NII applications [application size more than ₹1 crore] per IPO per quarter ranged between 229 and 747. Thanks to the policy interventions, this range decreased to 2 and 29 average ‘big ticket’ applications per quarter.”

SEBI offers more details about this study: 144 IPOs collec­tively raised a total of ₹2,13,000 crore during the study period. It adds, “As many as 43 IPOs raised approximately ₹92,000 crore [43% of the total amount raised] through the non-profitability route of fundraising.” The SEBI report also observed that almost half of the total allotted demat accounts for IPOs during the period of April 2021 to December 2023 were opened in the post-Covid period, and 85 per cent of the total allotted demat accounts were opened in the past eight years.

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