Ukraine-Style Volatility Hits India's IPO Market as Iran Conflict Looms

India's IPO Market Faces Uncertainty Amid Escalating West Asia War

India's primary market, which has seen record-breaking activity over the past two years, may be heading into a phase of uncertainty as the escalating West Asia war raises questions over the fate of upcoming initial public offerings (IPOs).

A Moneycontrol analysis of companies that filed draft red herring prospectuses (DRHPs) shows that 2022, when the Russia-Ukraine war disrupted global markets, recorded the highest IPO failure rate in the past four years. Only about half of the companies that filed DRHPs that year eventually made it to the market, highlighting how geopolitical shocks can derail listing plans. This trend is a cause for concern, particularly given the size of the current pipeline.

According to data from primary markets tracker Prime Database, over 200 companies have filed DRHPs with SEBI, including 138 approvals and 69 pending clearances. This indicates a sizeable queue of issuers waiting to tap the market.

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While history offers a cautionary precedent, the current situation may not necessarily mirror 2022. Investment bankers suggest that IPO activity typically slows when uncertainty spikes. They point out that similar patterns have been observed in the past, whether during the Russia-Ukraine conflict or periods of major political shifts in the US. Issuance activity tends to pause when volatility spikes, but resumes strongly once those risks are better understood and priced in.

The immediate concern, according to bankers, is the sharp rise in volatility indicators and commodity prices. With the VIX, the market volatility index, at elevated levels and crude prices firming up, pricing IPOs has become more challenging in the near term.

However, the market has not come to a complete halt. Domestic institutional investors have emerged as a key counterweight to foreign outflows, cushioning the impact of volatility. Strong domestic participation is providing a meaningful counterbalance, with investors continuing to back companies that demonstrate a credible path to profitability.

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The shift is reflecting in how companies are approaching valuations. Large new-age companies may opt for more conservative pricing to ensure successful listings rather than risk postponement. This adjustment in pricing expectations is a rational response to the current market conditions.

Industry experts believe that while timelines and valuations may adjust, the pipeline will likely remain intact. The broader IPO pipeline remains steady and is, in many ways, becoming more robust and driven by underlying fundamentals.

Bankers caution that in the near term, volatility remains the key variable for the IPO market. If geopolitical risks escalate further or persist longer than expected, a repeat of 2022's elevated failure rate cannot be ruled out. However, they also express optimism that if markets stabilise and risks are priced in, the current slowdown could prove temporary.