The Indian IPO Story
A few years ago, companies worth more than $1 billion, without being listed on the stock market, were a rare occurrence, and therefore they were called unicorns. However, in recent years, the term “unicorn” became popular as an increasing number of companies crossed this threshold, especially in the tech industry. Several new-age tech startups have taken advantage of the waves of money flooding the private equity markets. For many of these, taking a plunge into the public markets was the next apparent aspirational milestone. Going public helps companies raise a large pool of capital, diversify ownership, send a powerful signal to investors and consumers, and build the startup’s credibility. Moreover, an IPO today permits easy mergers and acquisitions in the future. In sum, an IPO is a crucial step on the road to success for a startup.
Benefits of IPO for Startups
So not surprisingly, the most frequently asked questions by founders are first, when to take the company public? and second, Is timing everything? It is critical to look at historical trends and understand how the IPO market has performed to find answers to these questions.
2021 was a landmark year for Indian startups making their public-market debut. More than INR 34 lakh crore were raised by Indian tech startups in total funding volume. The year also saw a record 11 startups listing on exchanges, giving hope to the next generation of startups.
SEBI easing IPO Filing guidelines in 2021
Typically the IPO window is short and narrow; 11 startups grabbed the opportunity, while the rest of the unicorns missed it in 2021. The startups that were listed enjoyed a “structural mega window”. The IPO boom of the year came with a conducive and supportive role by the regulators, along with market demand. SEBI’s board approved new norms that made it easier for new-age startups to list on the stock market.
This easing led to the IPOs of finance giant Paytm, food tech titan Zomato, and beauty e-commerce platform Nykaa. But soon after they were listed, these shares were hammered in the stock market. The share price of Paytm, listed under the name One 97 Communications, was down 70% from its IPO price. Nykaa’s share price crashed by over 62%. Similarly, Zomato’s shares halved shortly after its debut in July 2021. Towards the end of 2021, More than ten startups started to defer going public, including Snapdeal, Ola, Droom, MobiKwik, PharmEasy, Oyo, BoAt, and Flipkart.
2022 came with its share of surprises, apart from the deferring of IPOs in India and worldwide due to global headwinds. After a record-breaking 2021, the IPO activity in America declined to a 13-year low by volume and a 20-year low by value as market volatility and regulations implemented to fight inflation impacted markets. As seen from Europe’s IPO proceeds, markets felt the effects of geopolitical unrest, which fell 78%. On the other hand, Asia-Pacific markets performed relatively better, with record IPO proceeds raised in Mainland China and active IPO markets in Indonesia and Malaysia. In India, however, IPO activity was down 56% annually.
IPO activity in India over the years
According to BSE data, 2022 saw 88 initial public offerings (IPOs), with 36 launching on the main board and the remaining on the SME segment. Funds raised through IPOs also halved to nearly INR 59,412 crore in 2022 through the main board from ~INR 1.2 lakh crore in the previous year. A mere INR 5,843 crore was raised via IPO by new-age technology startups that got listed in the year, namely, Delhivery, DroneAcharya, and Tracxn Technologies.
In hindsight, this issue of failed IPO performance wasn’t caused by Indian investors not wanting to invest in startups but by the high valuations of these listed companies. But who was to blame here?
Markets swiftly blamed regulators. IPO failures sparked criticism of lax oversight by SEBI as these loss-making companies’ IPOs were priced at “lofty” valuations. After these IPO fiascos involving Paytm, Nykaa, and Zomato, SEBI increased its scrutiny, flagging concerns and proposing stricter disclosure requirements. It asked companies to provide more detailed information about their businesses and have their non-financial metrics, like KPIs, audited. Most importantly, it questioned the actual worth of these companies.
Such scrutiny compelled new-age tech companies to reevaluate their valuations and strategies and whether the timing of going public was right. Some startups also reported poor demand in the bid process and roadshows. IPO plans were delayed or scrapped due to investor wrath and SEBI scrutiny. Snapdeal, for instance, requested SEBI to withdraw its IPO regulatory papers after submitting them for approval in December 2021. PharmEasy also withdrew papers for its $760 million IPO in August 2022; boAT Lifestyle also withdrew its documents in October 2022.
These questions asked by SEBI were not really out of the blue. To start with, everything about these new-age tech IPOs when it came to valuations was debatable. The likes of Zomato, for example, a loss-making company with high cash burns, had a market cap of INR 1.3 trillion at its peak. At the same time, Jubilant Foods, which sells Domino’s Pizza and generates massive profits, was trading at half the valuation of Zomato!
This teaches us that startups must be reasonable in pricing their public offerings based on their core values, sound finances, and domestic capital market realities for the upcoming years. But, despite their shortcomings, companies like Zomato, Paytm, and Nykaa have demonstrated that even tech firms can IPO in India. To sum up, the year’s theme was “getting back to basics”. For the coming year, the only caveat for startup IPOs is listing at reasonable valuations.
While risks around key variables in 2022 are being carried forward to 2023, most of them have effectively been absorbed by prices and sentiment. The fundraising winter may drag on for a while, but the IPO market is expected to have a busy year in 2023 with several DRHPs in the pipeline. This is because market access is still necessary for businesses, and venture capitalists will still need to exit. The projection for the Indian economy, which is anticipated to expand by 6% in FY24 and become the world’s fastest-growing major economy, can also contribute to optimism for 2023.