What does the Zomato IPO tell us about Indian economy?

The food delivery company Zomato had a blockbuster initial public offering (IPO) recently. For each share that the company wanted to sell, it got applications for more than 38. So, roughly, if anyone had applied for 200 shares, they would have got around 5 shares. The company wanted to raise around Rs 9,400 crore through the IPO, it got applications of close to Rs 3.5 lakh crore. Such was the demand.

Before Zomato, Clean Science and Technology wanted to raise a little over Rs 1,500 crore. For each share it wanted to sell, it got applications for more than 93 shares. In rupee terms, it got applications worth more than Rs 1.4 lakh crore.

The success of recent IPOs has now led to a talk about many more unicorns like Zomato wanting to list on the stock market. A unicorn is basically a startup which is privately owned and worth more than a billion dollars.

So, the question is, what’s happening here? Interest rates on fixed deposits are at extremely low levels. In May, the average interest rate on term deposits (largely fixed deposits) of banks stood at 5.32%. Retail inflation for the month stood at 6.3%. The actual return from a fixed deposit can be lower than the interest paid on it, depending on the tax bracket one falls in.

Also, other forms of investing are down in the dumps. On the whole, real estate returns have been in single digits for years on end. Cryptocurrencies have done badly over the last few months. This has pushed many people towards stocks in general and IPOs in particular, in the hope of making a quick buck.

What hasn’t helped is the fact that small businesses have been struggling over the last few years. Demonetisation and a botched-up implementation of the Goods and Services Tax pushed them back. The continued spread of the Covid pandemic broke their backs. This has forced many small businessmen towards the stock market. They have come to the realisation that it has been easier to make money from the stock market over the last 16 months than by running an actual business.

Over and above this, work from home has made trading easier for a whole generation sitting in front of their computer screens and/or using mobile phone apps. The fact that demat accounts can be easily opened from the comfort of one’s homes and are cheaper than ever before, as are internet bandwidth and smart phones, has helped drive up demand for stocks further.

This can be gauged from the fact that the number of demat accounts between December 2019 and March 2021, the latest data available, has increased by 40%, from 3.93 crore to 5.51 crore.

And it doesn’t stop at this. Until a few years back, experts selling stocks were limited to business TV and newspapers and a few websites. Cheap smartphones and a cheaper internet have led to the rise of a massive number of social media influencers who are also selling stocks like experts of yore. Some of these guys have a massive following and people take their views very seriously. If they recommend a stock or an IPO, their followers go out and buy it.

The interesting bit is that in some cases these people are paid to make recommendations or paid for driving their followers towards a particular stockbroker. Of course, they don’t disclose this. Most influencer activity in investing would collapse if people came to know what is actually happening. Given that it’s spread across the social media and happens 24/7, it goes unregulated most of the time.

As mentioned earlier, interest rates lower than the rate of inflation are driving people towards stocks. On the flip side, the financial services industry is also flush with money. In this scenario, IPO financing has emerged as a lucrative business. Basically, IPO financing lets investors borrow money to invest in stock IPOs.

By borrowing, investors can hope to get a greater number of stocks in an IPO than if they were to invest just their own money. After allocation, these stocks can be sold on the stock market once the stock gets listed and the investor can hope to make a listing day gain.

Given the huge demand for IPO stocks, everyone isn’t going to get an allocation. Hence, anyone who wants to own a particular stock after its IPO needs to buy it from the market after listing. This pushes up the price of the stock, leading to listing day gains for those investors who borrowed and invested in the IPO.

News reports suggest that the non-banking finance companies (NBFCs) are betting big time on the IPO financing business. This at a point of time when bank lending to industry has grown by just 0.8% over the last one year.

Basically, we have reached a stage where the financial system is happy to lend to individuals to speculate in stocks, but it doesn’t want to lend to industry which creates economic activity. Of course, any lending is a two-way activity. Businesses are also not in the mood to borrow given the state of the economy. In some cases, they are yet to come out of their previous borrowing binge.

All this has led to a scenario where loss-making companies that might make profit some day will be valued at a very high price by the stock market. And Zomato has just kickstarted this. There is definitely more to come. As the Americans like to say, you ain’t seen nothing yet! Or if one were to go in for a more home-grown idiom, picture abhi baaki hai.