Cracking the Code on IPO Flipping: Uncovering Key Trends from SEBI's 2024 Investor Analysis

The Initial Public Offering (IPO) market has always been a critical avenue for companies to raise capital and for investors to capitalize on potential growth opportunities. However, the behavior of investors post-IPO, particularly their tendency to "flip" shares, has garnered significant attention. The Securities and Exchange Board of India (SEBI) recently conducted an in-depth study analyzing investor behavior in IPOs between FY22 and FY24. This article delves into the key findings from that study and what it means for the IPO landscape.

1. The Prevalence of IPO Flipping

One of the most striking findings from SEBI’s study is the high incidence of IPO flipping. Flipping refers to the rapid selling of shares shortly after an IPO, often within the first week of listing. SEBI's analysis revealed that about 54% of IPO shares (by value) allotted to investors were sold within a week of listing. This behavior was particularly pronounced among Non-Institutional Investors (NIIs), who flipped 63.3% of their shares by value, compared to 42.7% among retail investors.

2. Investor Categories and Exit Patterns

The study categorizes investors into Retail, NII, and Qualified Institutional Buyers (QIBs), including subcategories like Anchor Investors. Notably, the flipping behavior varied significantly across these groups:

• Retail Investors: Sold 50.2% of their shares within a week when the listing gains were more than 20%. This highlights the tendency to capitalize on immediate gains.
• NIIs: Displayed the highest exit rates, with 79.1% of their shares sold within a week in cases of high listing gains.
• QIBs: While Institutional Investors, particularly Anchor Investors, typically hold onto shares longer, the study found that excluding anchors, about 53.9% of IPO shares by value were sold within a week.

3. Impact of Policy Changes on Investor Behavior

Several policy changes introduced by SEBI and the Reserve Bank of India (RBI) during the study period had a notable impact on investor behavior. Key among these were:

• Introduction of Lottery-based Allotment for NIIs: Previously, shares were allotted on a pro-rata basis, favoring those applying for larger quantities. The shift to a lottery system, combined with a subdivision of the NII category into small-NIIs (s-NIIs) and big-NIIs (b-NIIs), led to a significant drop in the number of high-value applications (above ?1 crore) and a reduction in oversubscription levels from 38 times to 17 times.
• RBI's Restrictions on IPO Funding: Limiting IPO funding by Non-Banking Financial Companies (NBFCs) to ?1 crore per borrower also contributed to a decline in the proportion of large NII applications.

4. Regional Concentration and the Rise of New Investors

The study also shed light on the geographical distribution of IPO investors, with a significant concentration in states like Gujarat, Maharashtra, and Rajasthan. Furthermore, nearly half of the demat accounts participating in IPOs were opened during the post-COVID period (2021-2023), indicating a surge of new retail investors entering the market.

5. The Future of the IPO Market

SEBI’s analysis underscores the dynamic nature of the IPO market, influenced heavily by regulatory changes and investor sentiment. As the market continues to evolve, understanding these behavioral patterns will be crucial for both regulators and market participants.

For companies planning to go public, these insights highlight the importance of strategic timing and investor engagement, while for investors, particularly retail and NII participants, the findings emphasize the need for a more long-term perspective, balancing immediate gains with potential future returns.

As the IPO landscape continues to grow and mature, keeping abreast of these trends will be key to navigating the market successfully.

Link to the research report:

https://www.sebi.gov.in/reports-and-statistics/research/sep-2024/study-analysis-of-investor-behavior-in-initial-public-offerings-ipos-_86385.html