IPO investors sell shares

SEBI Study Reveals Over 50% of IPO Investors Sell Shares Within a Week of Listing

A recent study conducted by the Securities and Exchange Board of India (SEBI) has revealed significant insights into the behavior of individual investors in Initial Public Offerings (IPOs). The study analyzed investor actions in 144 Main Board public issues between April 2021 and December 2023 and found a prevalent trend of “flipping” — where investors quickly sell shares after listing, especially when they see positive returns.

Key Findings:

1. Investor Behavior Post-IPO Listing:
   • The study found that over 50% of individual investors sold their shares within the first week of the IPO listing. This figure increased to 70% within a year, indicating that a majority of investors are not holding onto their shares for the long term.
2. Influence of Returns on Selling Decisions:
   • The decision to sell was heavily influenced by the returns on the IPO. When the returns exceeded 20%, 67.6% of shares were sold within a week. In contrast, only 23.3% of shares were sold when the returns were negative. This behavior highlights a strong disposition effect, where investors are more likely to sell when they experience gains and hold onto losing stocks.
3. Increase in Demat Accounts Post-COVID:
   • The study also noted a significant increase in the number of demat accounts after the COVID-19 pandemic. Approximately half of the demat accounts that applied for IPOs during the study period were opened post-pandemic, indicating a surge in retail investor participation in the stock market.
4. Impact of SEBI’s Policy Changes on NII Participation:
   • SEBI’s policy changes in the Non-Institutional Investors (NII) share allotment process led to a decrease in the average number of applications from NIIs seeking more than ₹1 crore in IPOs. The average number of such applications dropped from around 626 per IPO in the pre-policy period to approximately 20 per IPO in the post-policy period.
5. Increase in SME IPOs and Investor Participation:
   • The study also highlighted the growth in the number of IPOs for Small and Medium Enterprises (SMEs) and the increasing investor interest in these issues. Over the last decade, more than ₹14,000 crores have been raised through SME IPOs, with a significant increase in both the number of listings and the amount raised in recent years. The market capitalization of these companies is now about ₹2 trillion.

Key Remarks from SEBI:

• Caution to Merchant Bankers and Accountants: SEBI Whole Time Member Ashwani Bhatia advised merchant bankers, chartered accountants, and exchanges to exercise greater diligence in reviewing documents filed for IPOs. He emphasized the need for thorough checks and balances to prevent companies from inflating balance sheets or taking shortcuts in the listing process.
• Advisory on SME IPOs: SEBI recently issued an advisory cautioning investors about the disclosures made by SME IPOs. Bhatia stressed that if companies attempt to inflate financials or take shortcuts, their relationship with intermediaries will be short-lived.

Advantages

1. Increased Retail Participation:
   • The surge in demat accounts and the high participation rate in IPOs reflect a growing interest in equity markets among retail investors, which can lead to a more diversified and resilient market.
2. Transparency in Market Trends:
   • SEBI’s study provides valuable insights into investor behavior, allowing policymakers and market participants to understand and potentially address the factors influencing short-term trading.
3. Growth in SME Sector:
   • The increase in SME IPOs and the funds raised indicate a robust growth trajectory for small and medium enterprises, which are vital for economic growth and job creation.
4. Stricter Oversight:
   • SEBI’s focus on better diligence and transparency in IPO processes helps in protecting investors and ensuring that only credible companies are able to raise funds from the public.

Disadvantages

1. Short-Term Trading Risk:
   • The high rate of flipping shares within a week of listing suggests that many investors are engaging in short-term trading, which can lead to increased market volatility and may not be conducive to long-term wealth creation.
2. Potential for Misleading Disclosures:
   • Despite SEBI’s efforts, the risk of companies providing misleading or inflated financial disclosures remains a concern, particularly in the SME sector.
3. Reduced Long-Term Investment:
   • The tendency of investors to sell shares quickly after listing may undermine the stability of companies that rely on long-term shareholder support for their growth and development.

Conclusion

SEBI’s study on IPO investor behavior highlights a significant trend of short-term trading among retail investors, driven largely by immediate returns post-listing. While this reflects a high level of engagement in the market, it also raises concerns about the sustainability of such behavior. The study underscores the importance of investor education and the need for stringent checks by intermediaries to ensure that IPO processes are transparent and reliable. As the market continues to evolve, SEBI’s role in safeguarding investor interests and promoting long-term investment will be crucial.

FAQs

1. What percentage of IPO investors sell their shares within a week of listing?
   • Over 50% of individual investors sold their shares within the first week of the IPO listing, according to SEBI’s study.
2. How does the return on IPOs affect investor behavior?
   • Investors are more likely to sell their shares quickly if the IPO returns are positive. The study found that 67.6% of shares were sold within a week when returns exceeded 20%.
3. What impact did SEBI’s policy changes have on NII participation in IPOs?
   • SEBI’s policy changes led to a significant reduction in the number of applications from Non-Institutional Investors (NIIs) seeking more than ₹1 crore in IPOs.
4. How has the SME IPO market evolved in recent years?
   • The SME IPO market has seen significant growth, with a 12-fold increase in funds raised over the last five years. The number of SME IPOs has also quadrupled during this period.
5. What precautions should investors take when investing in SME IPOs?
   • SEBI advises investors to be cautious about the disclosures made by SME IPOs and to ensure that they are investing in companies with transparent and reliable financials.

IPO investors sell shares

Dynacons Systems Shares Surge After Securing Major Order from Bank of Maharashtra