The IPO frenzy isn’t a sign of a robust stock market

livemint.com:

Recently, a two-wheeler dealership with a few dozen employees was in the news for an initial public offer (IPO) that attracted 400 times the money it sought to raise. This subscription rush highlighted the casino-like appeal of IPOs that seems to have taken retail investors in its thrall. Now, a study by the Securities and Exchange Board of India (Sebi) suggests that Indian investors have a large number of gamblers in their midst.

The market regulator’s analysis of 144 IPOs (with their stocks listed between April 2021 and December 2023) shows that a staggering 54% of the share allotments by value to non-anchor subscribers were sold within a week of listing, while 70% were offloaded within a year. Among individual investors, this tendency was pronounced for shares that gained in value after making their debut. For stocks that rose more than 20%, they encashed 67.6% of their allotments by value within a week.

Investors have been chasing quick returns, which are now being taken for granted, clearly, no matter how good or bad the debut-making company’s earning prospects may be. Indeed, share prices seem driven more by large lumps of money going into them than anything these businesses are achieving for sustainable shareholder value. Three-fourths of the IPOs analyzed by Sebi saw a post-debut bump-up, while nearly a fifth saw a listing-day rise of over 50%.

This looks like a throwback to pre-Sebi days, when issue prices were set by the Controller of Capital Issues. Back then, even prized stocks often had to be offered at their face value, with the result that demand far exceeded supply, turning allotment into a lottery. The lucky few who got primary shares could cash out at a huge profit as soon as their trading began.