Investing in IPOs

THEY CAN SERVE AS FINANCIAL MANOEUVRES THAT BENEFIT INSIDERS FAR MORE THAN THE AVERAGE INVESTOR

- RAGHU PALAT

NOVEMBER IS GOING to be another month of mega-initial public offerings (IPOs) keeping up the growing enthusiasm to cash in on the primary market boom.

This trend has been gaining strength over the last few years. In FY23 there were 37 issues that collectively raised $52,116 crore. The following year there was a marginal increase, with 76 issues mobilising $61,922 crore. In the next financial year there was a sharp escalation. Although there were a slight increase in issues to 78, the funds raised surged to 162,387 crore—nearly treble the previous year’s amount.

The momentum has continued in the current financial year as well. In the first seven months, there have been 74 issues that have raised 107,341 crore. The excitement persists with the Lenskart issue which opened on October 31. The company has, prior to the IPO, mobilised %3,300 crore from 147 anchor investors and is hoping to raise a total of ¢7,200 crore from the market. Several other high-profile issues are lined up this month, such as ICICI Prudential AMC, Groww and Pine Labs, to keep the frenzy alive.

While an IPO is a legitimate and often recommended way of raising capital—especially for those seeking funds for expansion—investors should consider several critical factors before participating in one.

First of all, an IPO often serves as the means by which early investors can exit the company. This raises a very pertinent question. If the company’s prospects are truly as strong as advertised, why are these investors choosing to depart now? One possible reason lies in the pricing—often structured to ensure substantial profits for existing investors, and at the expense of new retail participants.