SEBI Warns Retail Investors: 54% of IPO Shares Sold Within a Week – Are You Investing for the Long Run?

On September 2, the Securities and Exchange Board of India (SEBI) released a report showing that most retail investors buy IPOs for short-term gains, not for long-term investments. The study found that 54% of IPO shares, excluding those given to anchor investors, are sold within a week of listing.

Anand K Rathi, co-founder of MIRA Money, a wealth management firm, mentioned, “Retail investors are focusing on short-term profits instead of holding onto IPO shares for the long term.” He added that even long-term investors often invest in IPOs without fully understanding whether the investment will benefit them in the future.

Pritha Jha, a partner at Pioneer Legal, explained that stocks might rise right after listing, but they often drop once the initial excitement wears off. This causes long-term investors to put money into IPOs without clear reasoning or understanding of the risks.

SEBI’s Warning for SME Market

Before publishing its study, SEBI had already raised concerns about small and medium enterprises (SMEs) manipulating the market. Promoters of these companies sometimes paint a rosy picture of their business, announce bonus shares, and stock splits to boost investor interest, only to sell their shares at inflated prices. Since 2012, SMEs have raised over ₹14,000 crore through the stock exchanges, but SEBI is worried about these unfair practices.

IPO Frenzy: Making the Most of the Boom

Tejas Khoday, founder of the web trading platform Fyers, pointed out that India saw 272 IPOs in FY24, with 80% of them coming from SMEs. Many IPOs, such as TAC Infosec’s ₹30-crore IPO, were oversubscribed by huge margins. Even startups like Go Digit, Awfis, ixigo, FirstCry, and Ola Electric have entered the market, signaling the renewed interest in IPOs after a slow 2022 and 2023.

However, experts are warning that many companies are using this market boom to go public, even if they aren’t well-managed. They believe the high level of oversubscription, especially among SMEs, is leading to greed. Some companies are rushing to list without meeting high governance standards, which can be risky for investors.

SEBI Urges Caution

In response to the rising number of IPOs, Ashwani Bhatia, a full-time SEBI member, called on merchant bankers, chartered accountants, and stock exchanges to be more selective when approving IPOs. He asked them to say ‘no’ more often to public listings, especially for companies that may not be ready for the market.

Tejas Khoday agreed, emphasizing the need for better-regulated IPO processes to ensure that only quality companies are allowed to list. SEBI’s new consultation paper from August 28 aims to tighten the rules for merchant bankers, setting higher standards to ensure responsible IPOs.

Merchant Bankers’ Responsibility

Pritha Jha added that merchant bankers and wealth managers often have more information about companies than what is disclosed in IPO documents. They have a responsibility to share this information with investors to prevent them from making uninformed decisions. SEBI is urging these advisors to be cautious because if a company fails, public money is lost, and SEBI may be questioned for not acting sooner.

Tips for IPO Investors

Experts recommend that investors take time to research before investing in IPOs. Sarvjeet Singh Virk, co-founder of Shoonya by Finvasia, advised investors to:

1. Study the company’s fundamentals – Look at its growth potential, business model, and order book.
2. Understand the industry – Evaluate how the company fits within its industry and its potential for future growth.
3. Read the prospectus – The Draft Red Herring Prospectus (DRHP) or Red Herring Prospectus (RHP) contains important information about how the company plans to use the funds raised.
4. Check the shareholding pattern – See who the key shareholders are and how much they own.

SEBI’s warnings aim to protect investors by encouraging both financial advisors and the public to be cautious and well-informed before investing in IPOs.