IPOs dry up as low returns deter investors

The new listings (IPOs) in the markets have come down drastically over the past three years, owing to investor apathy arising out of lower returns and corporate governance issues.

Since 2014-15, when the total number of new listings peaked at 311, the number has been showing a constant decline, touching a six-year low of 116 Initial Public Offerings (IPOs) during the financial year ended March 2019.

During the year, the IPOs saw an annual decline of 45.5%, highest ever since 2001-02, when the new IPOs had declined by a whopping 79.6%, an analysis of data available with BSE reveals.

The situation seems to be getting worse. Till now (April), in the current financial year, there has been not a single company coming out with an IPO compared with over 20 in the corresponding period of the last financial year.

In 2015-16, the number of IPOs remained constant at 311, compared with the previous year. In 2016-17, when the decline in the IPOs started, the number dropped 22.2% to 242 new listings. This was followed by a 12% decline in 2017-18 when the number of IPOs plunged to 213.

According to experts, this can be attributed to lower returns provided by the IPOs in the Indian markets. “We have seen declining returns on the IPOs in some time. So investors are keeping away from the IPOs. If you observe, very few IPOs have become hits in the past year,” according to Motilal Oswal’s Rahul Shah.

Usually, investors expect a return of over 20% on the IPOs with a very minimal downside. However, according to data available with Motilal Oswal, the average return of 72 IPOs on the BSE in the previous year stands at a mere 14%. Also, of the 72 IPOs, 31 companies that went for IPOs in the past year, have seen degrowth by an average of 32%. Similarly, on the NSE, the IPOs during last financial year have seen a growth of a mere 15%.

Many experts attribute this phenomenon to the corporate governance issues that have been crippling India’s corporate sector, of late. “I think main governance issues impacting them are related party transactions. Investors are looking more into who are the related parties involved and how they have structured the IPO,” said Sriram Subramaniam, MD at corporate governance firm InGovern.