Initial Public Offerings (IPOs) are among the most sought-after investment opportunities for retail investors today. This is mainly because of the rise of startups and privately funded businesses in India. Today, several significant companies are privately funded by angel investors, venture capitalists, and business owners themselves. Some of these businesses have captured considerable market share and are a major part of people’s lives daily.

However, these companies are not listed on stock exchanges, so investors do not have any way to invest in them. So, when the announcements come that a major startup like Paytm or Zomato is going to launch its IPO, it creates a frenzy among investors. Why? Because both Paytm and Zomato were leading businesses in their domains and were popular among consumers. The two companies mentioned launched their IPOs in the past few years and were highly successful.

But there’s more to the whole thing than investors wanting to invest in companies they know and companies trying to raise capital from the public. Let’s take a closer look at the ‘IPO Boom’ in India and why companies are more interested in going public now than ever before. We can also understand how retail investor participation has increased in IPOs and the factors behind it.

A Look Into The ‘IPO Boom’ in India

In FY 24, the number of IPOs launched in India increased from 164 in the previous financial year to 272. The increase has not just been in the number of IPOs; the amount of money raised by these IPOs has also increased from ?54,773 crore to ?67,995 crore in 2024. The data mentioned above only considers mainline IPOs.

The Economic Survey 2023-24 issued by the Government of India also states that SME (Small and Medium Enterprise) IPOs have grown significantly over the last year. The SME exchanges on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) witnessed heightened activity with a higher number of IPOs and FPOs (Follow-on Public Offers). In FY 24, the number of SME IPOs and FPOs increased from 125 to 196. This increased number of IPOs and FPOs led to public fundraising of over ?6,095 crores by SMEs in 2024.

So, what’s causing the ‘IPO boom‘ in India? The short answer is the increased interest of retail investors in IPOs. But why has retail investor participation increased in IPOs? Let’s understand the factors and how exactly retail investor participation has increased.

How Has Retail Investor Participation Increased in IPOs?

There are over nine crore retail investors in India who collectively own around 10% of all listed (2,500) companies on Indian stock exchanges through direct ownership. The number of retail investors is continuously increasing in India, and lakhs of new DEMAT accounts are made almost every month.

In July 2024, 42 lakh new DEMAT accounts were created, the most in a month in 2024 so far. A significant reason for the increased number of DEMAT account sign-ups is IPOs. Let’s look at how this translates into increased participation of retail investors in IPOs.

As per a report by Prime Database Group, Indian IPOs launched in 2024 have rallied returns of over 54% since their launch. This is well above the global average. In fact, retail investors invested over ?83,000 crores in IPO shares in the 36 IPOs launched in India in 2024. The value of money invested is over 12 times more than the shares made available to them. For seven IPOs that launched in the past few months of 2024, retail investors oversubscribed their portion by almost 50 times. But why are retail investors rushing to invest in IPOs? While several factors are causing the rise, the main one is the possibility of quick returns.

The listing gains offered by IPOs in the recent past ensure investors that IPO allotment promises quick money/returns. For example, the Exicom Tele-Systems IPO launched in February 2024 was oversubscribed by retail investors 120 times. After allotment, the stock prices rallied over 230% above the IPO price. This helped retail investors who received allotments to make a significant profit on their investments.

Major Factors Driving Increased Retail Investor Interest in IPOs

Three major factors lead to increased retail investor interest in IPOs. These factors include the participation of younger investors, improved market stability, and market regulator surveillance.

1. Added Participation of Young Investors: Young investors are moving away from traditional asset classes like real estate investments and instead investing in the stock market after building capital from their professional experience. From investing in the stock market for tax savings to investing in various financial assets for wealth creation, more young investors are entering the stock market than ever before. This has decreased Foreign Portfolio Outflow (FPI) and allowed the Indian stock markets to have a cushion.

2. Added Market Stability: After the General Elections in India, a stable new central government has reinstated stability in the stock markets. Market analysts have also noted that the Indian stock markets have shown signs of stability, and it is expected that this will attract more retail investors to the market.

3. Securities and Exchange Board of India (SEBI): The stock market regulator in India, SEBI, has taken proactive measures to protect the interests of retail investors. To ensure that investors are not falling into debt traps, they have made it harder for investors to obtain credit for investing in the stock market. SEBI also maintains regular surveillance of the stock markets to ensure any malpractices can be curbed. These factors instill retail investors' confidence in the market and attract them to invest more.

Serious Truth About Retail Investor Participation in IPOs

Companies spend significant money to create hype around IPOs, which leads to oversubscription. This type of hype-building leads to masses of retail investors flocking to invest in IPOs without fully understanding the business or building long-term investment strategies. The focus on flipping IPO allotments for quick returns can be highly risky for investors who are participating in IPOs only for their hype. This creates a very high risk of capital losses and debt traps, especially if investors are borrowing money to invest in IPOs.

Conclusion

The rise of retail investors in IPOs has led to more companies planning to go public. Reports have stated that at least 15 companies are planning to launch IPOs in India in the remaining months of 2024. These IPOs are expected to raise over ?91,300 crores in funding. Companies are experiencing highly successful IPOs due to the increased participation of retail investors. Individual investors are earning handsome short-term returns on the backs of IPO allocations. These factors are leading to a cyclic growth of IPO popularity and the participation of retail investors in them. For more information about IPOs and how to invest in them, check out Sharekhan Knowledge Center.