A recent study by the Securities and Exchange Board of India (SEBI) reveals that over half of the shares allotted to investors, excluding anchor investors, during initial public offerings (IPOs) are sold within a week of listing. This analysis, which encompasses 144 Main Board IPOs listed between April 2021 and December 2023, sheds light on the changing behavior of retail investors, particularly in the aftermath of the COVID-19 pandemic.
One of the primary findings of the study is the rise in “flipping” behavior among individual investors, with data showing that 50% of IPO shares allotted by value were sold within a week of listing, and 70% by value were sold within a year. This behavior indicates that many investors are quickly cashing out on their IPO gains rather than holding onto the stocks for long-term growth.
The SEBI study aimed to dissect investor trends in the aftermath of increased participation from retail investors and oversubscription rates witnessed during recent IPOs. Retail investors, encouraged by buoyant market conditions, have shown a distinct tendency to offload shares quickly after listing, with half of their allocated shares being sold off within the initial week and 70% within a year.
SEBI’s study also highlights the role of the “disposition effect” among investors, which refers to a greater tendency to sell stocks that post positive listing gains, while holding on to those that listed at a loss. The data suggests that investors are more likely to sell when they see immediate profits rather than holding onto underperforming shares in hopes of a recovery.
The study further underscores the correlation between IPO returns and selling behavior. When IPO returns exceeded 20%, individual investors sold 67.6% of the shares by value within the first week of listing. Conversely, in cases where returns were negative, only 23.3% of shares by value were sold in the same time frame.
This tendency to sell shares after a strong performance hint at an opportunistic approach by retail investors, capitalizing on quick gains rather than waiting for potential long-term appreciation. With IPOs often generating high volatility in the immediate post-listing period, such behavior aligns with the short-term trading strategies employed by many investors.
Another significant trend highlighted in the SEBI report is the surge in demat accounts following the onset of the COVID-19 pandemic. Nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during this period. This surge reflects the growing participation of retail investors in equity markets, driven by a combination of favorable market conditions and increased access to online trading platforms.
SEBI also examined the impact of regulatory interventions, particularly in relation to the Non-Institutional Investor (NII) category. Following policy changes introduced in April 2022, which included modifications to the NII share allotment process and guidelines on IPO financing by Non-Banking Financial Companies (NBFCs) as issued by the Reserve Bank of India (RBI), a marked reduction in NII category oversubscription was observed.
The oversubscription in the NII category halved, dropping from 38 times to 17 times. Furthermore, the number of “big ticket” NII investors applying for more than ₹1 crore in IPOs saw a sharp decline. The average number of such applications dropped from approximately 626 per IPO in the pre-policy period (April 2021 – March 2022) to just 20 per IPO in the post-policy period (April 2022 – December 2023). Despite this reduction, the total funds raised during the two periods remained comparable.
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