The year 2021 was a remarkable year in terms of amount raised and return garnered from the primary market via IPOs (Initial Public offerings) route. A record Rs 1.18 trillion-plus (USD 15.8 Billion) was mopped up through share sale this year by 63 companies in 2021, says Amit Pamnani, Chief Investment Officer & DGM for Investment Banking at Swastika Investmart Ltd.  

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 He says we may see more IPOs in 2022 figuratively, but amount raised via IPOs will remain less or close to the money raised in 2021.  

 "We at Swastika have got record inquiries from companies & startups for planning their IPOs. We expect the same euphoria in the primary market continues for next year too," said Amit Pamnani.  

 He also talked in detail about recent amendments made by the market watchdog SEBI based on learnings from the success & failures of IPOs in 2021, fund utilization plans of issuer companies and anchor investors exit. He said, overall, the decision by the market regulator was taken in favour of the small investors and brings in more accountability from the companies flaoting IPOs.

 This is what Amit Pamnani  says about the impact of each of the amendments made by SEBI on 28th December 2021:  

 1. Increase in the lock-in period of Anchor investors  

 The major amendment made by SEBI is the increase in the lock-in period of Anchor investors. Now anchor investors have to hold at least 50 percent of the shares allotted in their category for 90 days instead of the current lock-in of just 30 days. They can sell 50% post completion of 30 days. “It is felt that a longer lock-in for anchor investors will provide more confidence to other investors. However, anchor investors’ contribution may reduce in the IPOs and companies had to plan smaller size IPOs.  

 2 General Corporate Purpose (GCP) limit augmented  

One of the heads in which companies utilize the amount raised from the issue is the general corporate purpose (GCP) shall not exceed 35% of the total amount being raised. It is increased from the earlier limit of 25%. This is good news for companies whose utilization plan is dependent on the future course of action or business.  

 3. Capping on Fund utilization for inorganic growth  

SEBI changed the conditions of allocation of issues for future inorganic growth. The amount so earmarked for such objects where the issuer company has not identified an acquisition or investment target shall not exceed 25% of the amount being raised by the issuer. If the issuer made suitable disclosure about acquisition or investment target company, the above limit shall not apply to them.  

 We think capping will ensure the utilization of funds as per earmarked objectives. In case acquisition gets delayed companies cannot use the fund for long or had to invest in other heads which were not planned during the issue. It’s a well-thought decision of SEBI.

 4. Offer for sale limits fixed for without track record companies.  

 In an offer for sale, the shareholder who holds more than 20% of the pre-issue shareholding and intends to sell his shareholding to the public shall not sell more than 50% of his pre-issue shareholding. If the shareholder’s holding is less than 20% then he cannot sell more than 10% of pre-issue capital.

 This condition is for the issuer company without a track record, which means it is either having losses or a young company.

 5. Floor price in book building method reduced to 105%

 Another major change made by SEBI is in pricing by the book building method. It is on the price band which earlier was up to 20% of the floor price, SEBI now changed it to 105% of the floor price. It shall be applicable for all issues opening on or after notification in the official gazette.

As per our analysis, this will ascertain the book building process happening in a range-bound valuation. Since many IPOs listed on higher prices band like Paytm, Policy Bazaar, Kalyan Jewellers, RateGain, etc. that fell by over 20% towards the lower price band within a week.

 SEBI also revised the allocation methodology for Non-Institutional Investors (NIIs) for book-built issues opening on or after April 01, 2022. In which 1/3rd portion of NII is for those who applicants with application size of more than two lakh rupees and up to ten lakh rupees and now two-thirds of the portion available to NIIs shall be reserved for applicants with application size of more than ten lakh rupees.

 What will be the impact on the Indian IPO market?

Overall, our view is welcoming on every amendment made by SEBI after a thorough analysis of IPOs came in 2021. It will protect the interest of small investors and provide a streamlined guideline for companies for utilizing the fund for earmarked objectives only.

Going forward, we expect upcoming IPO sizes will get reduced and valuations will be realistic. Startup companies that have lined up IPOs in FY 2022 need to re-assess the size and utilization plans since many amendments like pricing, OFS limits, anchor investors will affect the performance of listing.

We predict that year 2022 may see more IPOs however the aggregate amount may be lesser than or nearby to the amount raised in 2021 only.