IPO Activity Slows Amid Tightening Market Conditions, Foreign Banks Gain Market Share

Indian IPO Market Faces Subdued Conditions

The Indian IPO market has experienced a significant downturn in the past year, with valuations of issues coming to market declining by 25-30% from their peak in 2024. Foreign institutional investors (FIIs) have retreated, and retail money has also taken a step back.

Key factors contributing to the decline include the absence of two out of the three primary investor segments: domestic institutions and retail investors. FIIs have been negative on India due to high market valuations and ambiguous Indo-US trade dynamics, while retail investors have migrated to gold due to the lack of returns in the equity market.

Domestic mutual funds are supporting the market through systematic investment plan (SIP) flows, but these funds are primarily using the new money to maintain their existing secondary market positions. The absence of FIIs and retail investors is hindering the demand for fresh IPOs.

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Valuations remain high despite declining prices, with companies still listing at levels below their private market valuations. This is due to the limited options available to companies, including debt financing, which is not feasible for new-age, asset-light businesses.

A potential catalyst for recovery could be the unwinding of the AI trade, which has driven significant capital flows to emerging markets. If this capital is redirected to India, it could lead to a resurgence in the IPO market.

Recent trends in IPOs include a shift towards larger, more expensive deals, with the average IPO size increasing to Rs 700-800 crore. This has led to a decrease in the number of successful IPOs and a shift towards larger deals being handled by foreign banks, such as Morgan Stanley and JP Morgan.

The rise in offer-for-sale (OFS) portions of IPOs can be attributed to the need for private equity funds to exit their investments and the regulatory requirements surrounding fresh issue capital.

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