India’s IPO boom: A red flag or a sign of robust investor confidence?

The number of IPOs on the Indian stock markets this year has surged compared to 2022, but the value raised is still shy of 2021’s record high

The Bombay Stock Exchange building in Mumbai. India’s stock market value reached more than $4 trillion last week for the first time, marking a key milestone for the world’s fifth-biggest equity market. BloombergShow less

Ravi Agarwal describes the decision to list his company, Cellecor Gadgets, on India’s stock markets as a “monumental moment”.

For founder and managing director of the consumer electronics brand, the move not only reflected the rise of his company, but also India’s growth story.

New Delhi-based Cellecor made its debut on the National Stock Exchange SME index on September 28 and it is one of the companies that has contributed to India's record-breaking year in terms of the number of initial public offerings.

“This year's IPO boom in India is a testament to the nation's economic resilience and dynamism,” says Mr Agarwal. “Factors such as robust fundamentals, a growing middle class, and an appetite for innovation are driving this surge.”

Like Cellecor, most of the listings in 2023 took place on SME – or small and medium-sized enterprise – exchanges.

India has emerged on top globally as well in terms of the IPO volumes so far this year, helped by the number of equity market deals during the third quarter, a report by global professional services firm EY said.

A total of 69 IPOs took place in India in the three months to the end of September, including 48 listings on SME exchanges and 21 in the main market. The volume of deals is up 425 per cent compared to the same period last year, EY's figures show.

The value, however, is more modest this year when compared to the past couple of years. Data from Prime Database shows funds raised so far this year totalled $5.41 billion through more than 200 IPOs.

That compares to $7.34 billion in 2022 and a record high of $14.34 billion in 2021.

Still, analysts see the rise in the number of listings as a positive development.

IPOs launched this year include a broad range of companies. Among the companies that have gone public are Mankind Pharma, Tata Technologies and drone maker ideaForge.

The biggest listings in the third quarter included wire and cable manufacturer RR Kabel and biotechnology company Concord Biotech.

“The surge in retail investors' participation, coupled with daily market highs, has infused newfound liquidity into the public market,” says Teja Ramineni, co-founder of Avenue Holdings, a financial services company.

“This influx of funds provides companies with a robust platform to access capital, serving as a pivotal driver behind the flourishing IPO landscape.”

This can be “attributed to a confluence of factors, including a robust stock market, favourable economic conditions, progressive regulatory reforms, and the rise of unicorn start-ups”, he says.

India's economy grew by a robust 7.6 per cent in the September quarter from a year earlier, according to the official data.

The fact that listings are more modest in size on the main market is reflective of investors becoming more discerning about how they deploy their capital, Mr Ramineni explains.

In 2021, a number of high-profile start-ups went public, including Paytm and PolicyBazaar. However, these companies hit the markets at overvalued prices, leaving investors sitting on shares that are below their listing prices even today.

Last year, Life Insurance Corporation's IPO was the biggest the country had ever seen, but its share price tumbled after the market debut and has yet to fully recover.

“There is a preference for profitable enterprises with established track records, and global market volatility has contributed to moderating IPO sizes.”

He believes the trend is much more sustainable and is indicative of “a robust IPO environment”.

This comes as India's stock markets have hit multiple record highs following a slump in October. Last week, the benchmark S&P BSE Sensex and the NSE Nifty 50, posted their best weekly gain since July 2022.

The country’s equity markets have been rising for six consecutive weeks, helped by factors, including strong economic data, a decline in oil prices, and the ruling Bharatiya Janata Party's victory in recent state elections.

These developments have fuelled both foreign fund inflows as well as strong domestic investor demand, strengthening optimism about a booming IPO market into the new year.

“The future of IPOs seems to be very promising, and it is expected that there will be a continued surge in the coming months, which will extend into the following year,” says Kulbhushan Parashar, founder and managing director, Corporate Capital Ventures, a capital markets advisory firm.

“This growth is driven by the expansion of businesses in India, which aligns with the country's rapid economic development.”

Companies are trying to file for IPOs before the 2024 general elections in the country, expected to be held between April and May.

A slump in the US and global markets, as well as geopolitical instability could potentially affect investor sentiment, market analysts say. Bloomberg

More than 25 companies have filed their Draft Red Herring Prospectus (DRHP) in the third quarter, “demonstrating a strong intent to raise funds in the upcoming quarters”, analysts at EY write in their report.

“The markets continue to reward companies with robust, scalable, and well-governed business models,” they add.

“Companies from various industries in India are actively pursuing listings in the current IPO surge,” says Mr Parashar.

“The spectrum of companies seeking listings is broad, ranging from well-established conventional businesses to cutting-edge technology firms and innovative start-ups.”

Sona Machinery, a manufacturer of agro-processing machinery, is one of the companies that is planning to go public.

It has already filed its DRHP and it is aiming to launch its IPO soon after completing the required regulatory processes.

“This will be a ‘fresh issue’ of up to 3.62 million shares with a face value of 10 rupees per share on NSE Emerge, the SME platform of the National Stock Exchange of India,” says Vasu Naren, chairman and managing director, Sona Machinery.

The company plans to use the capital generated to expand its manufacturing operations.

“The market scenario has been quite volatile in the recent past,” he says, adding that he is not worried about the volatility because of growth prospects in the industry and the strong fundamentals of the Indian economy.

“This is a compounding effect from the market, investor confidence, and increase in customer spending”, while the business landscape is also getting a boost from government policies and a supportive regulatory environment, he says.

Despite the optimism, observers warn there are some risks that could dampen the current market euphoria.

“Positive sentiments from both domestic and foreign investors toward India suggest that this momentum will likely persist until mid-2024,” says Mr Ramineni, but he adds that any “slump in US and global markets, along with geopolitical instability ... could contribute to a slowdown in the IPO momentum”.

The global economy and the elections are risk factors that have the potential to affect investor sentiment, said Mr Parashar.

But he doesn’t see these as major threats currently.

“We do not anticipate any other significant obstacles that could hinder the ongoing positive momentum in the IPO space,” says Mr Parashar.

Similarly, Mr Agarwal at Cellecor remains upbeat on the future following his company's IPO, as the brand uses the funds to boost its innovation and widen its product range.

“The outlook is optimistic, reflecting sustained interest and confidence in the market,” he says. “It's an exciting time for companies like ours.”