Capital markets regulator SEBI, in its latest study ‘Analysis of Investor Behavior in Initial Public Offerings (IPOs), found "flipping" investor behaviour among individual investors.
Other issues found among individual investors were returns influencing the selling behaviour, surge in demat accounts post-COVID, and significant reduction in NII category oversubscription.
The SEBI study was conducted in light of the increasing participation of retail investors and the heightened "oversubscription" in recent IPOs. It encompassed data from 144 IPOs listed between April 2021 and December 2023.
Highlighting investor behaviour, the study finds investors sold 50% shares allotted to them by value within a week of listing, and 70% of shares by value in a year. “The total number of shareholders in these IPOs dropped significantly on listing date and two days post listing. The total number of shareholders remained stable after 1 month.”
SEBI also found that during the first week of listing, individuals were "net sellers", whereas mutual funds were "net buyers". In the first week, individuals sold shares worth about ₹15,000 crore across IPOs, while MFs bought about the same amount of shares. Banks and cCorporates were also "net sellers" in the first week of listing.
The study found a strong disposition effect, with investors showing a greater propensity to sell IPO shares that posted positive listing gains, compared to those that listed at a loss. The study says 39.3% of retail investors were from Gujarat, followed by Maharashtra (13.5%), and Rajasthan (10.5%).
The SEBI study says returns influenced the selling behaviour. “When IPO returns exceeded 20%, individual investors sold 67.6% of the shares by value within a week. In contrast, only 23.3% of shares by value were sold when returns were negative.”
There has been a huge surge in demat accounts post-COVID, says SEBI, adding that nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during the post-COVID period (i.e., 2021-2023).
Following SEBI’s policy interventions regarding non-institutional investor (NII) share allotment process and RBI’s guidelines on IPO financing by NBFCs in April 2022, the regulator observed a significant reduction in NII category oversubscription. “Oversubscription under the NII category halved from 38 times to 17 times.”
Notably, in April 2022, the key policy measures were introduced by SEBI and RBI, especially for NII category. SEBI made changes in share allotment methodology from pro-rata basis to lottery basis for NII category and subdivided NII category (15% quota) into small-NII (5% quota) and big-NII (10% quota) categories, while the RBI introduced restrictions on IPO funding by NBFC upto ₹1 crore per borrower.
The study says there was also a sharp decline in applications from “Big Ticket NII Investors”. The average number of applications from NII investors applying for over ₹1 crore in IPOs dropped from around 626 per IPO in the pre-policy period (April 2021 - March 2022) to around 20 per IPO in the post-policy period (April 2022 - December 2023). “Note that the total funds raised during the two periods were comparable,” says SEBI.
