Thought
5 min
learn
22 Oct 2024, 09:00 AM
IST
Summary
- Whereas IPOs historically raised cash to forge unique paths and amplify companies, their purpose has changed. For the time being, most IPOs are affords for sale, with promoters and diversified shareholders selling their shares to the public. Some equity sellers are VC and PE players aiming to cash out.
Final week, Hyundai Motor India raised cessation to ₹28,000 crore thru its preliminary public offering (IPO). Files from High Database means that as of 17 October, 42 IPOs had raised higher than ₹78,000 crore for the period of 2024-25.
With the exception of 2017-18, when ₹81,553 crore used to be raised by companies thru IPOs, and 2021-22, when over ₹1.1 trillion used to be raised, right here's the top in all probability quantity ever with higher than 5 months left for the financial twelve months to end. Of direction, these are absolute numbers and don’t clutch the scale of the Indian economic system into yarn.
Historically, IPOs maintain most continuously been seen as a formulation for companies to promote the public unique shares in order to hold cash to finance unique investments and amplify their enterprise. As Satyajit Das writes in The Age of Stagnation: “Stock markets are designed to facilitate capital raisings for investments [in] initiatives."
Or, as John Kay writes in Other Folk’s Cash: “The predominant companies to invent listings on contemporary markets had been companies adore railways and breweries, with colossal requirements for capital for terribly particular positive aspects. Building a railway is costly, and whereas you've built it primarily the most attention-grabbing thing which which you would per chance presumably perchance furthermore enact with it is scramble trains. You cannot use a brewery besides to brew beer."
Additionally learn: IPO customers: Why the scramble to promote would be a neglected opportunity
But that’s history. In 2024-25, a predominant chunk of the funds raised to this level thru IPOs in India came from affords for sale. In an provide for sale, no unique shares are issued; it is the promoters of companies and their new colossal customers who promote their shares to the public.
Basically, the whole funds raised thru Hyundai Motor India’s IPO came from an provide for sale. To build up a clearer image, we maintain to yarn for the colossal dimension of this IPO.
How did the predominant market note earlier than this IPO? Files from High Database means that as of 11 October, cessation to 49% of the IPO cash raised used to be thru affords for sale. Hyundai’s IPO has taken it to about two-thirds.
Certainly, in each and every of the years since 2015-16, higher than half the IPO cash raised has advance thru affords for sale. In that sense, this has been happening for cessation to a decade.
If we note at records from the commence of 2015-16 except 17 October, ₹494,375 crore has been raised thru IPOs. Of this, ₹338,759 crore, or higher than 68%, has been raised thru affords for sale. If we note at a newer period from the commence of 2020-21, ₹335,027 crore has been raised thru IPOs. Of this, ₹216,563 crore, or cessation to 65%, used to be raised thru affords for sale.
So, round a third of the cash raised thru IPOs has sharp new shares being issued. Now, does that time out this cash used to be raised for impress unique investments and enterprise expansion? No longer the truth is.
As Pranav Haldea, managing director of High Database, says: “The brand new capital raised would now not primarily repeatedly creep towards enterprise expansion. In diverse conditions, it has also long gone towards retirement of debt or overall corporate positive aspects."
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Clearly, clarification why Indian companies develop cash thru IPOs has changed through the years. If we note at records for the period between 2001-02 and 2014-15, of the ₹171,676 crore raised, higher than 75% used to be raised thru the issuance of new shares. If we omit 2010-11, when hundreds of cash used to be raised thru affords for sale, cessation to 85% used to be raised thru the brand new declare of shares.
Certainly, the structure of the Indian IPO market has changed. As Kay places it in The Corporation within the twenty first Century: “The aim of the IPO is never any longer to hold capital but to order to earlier customers and workers that there's worth of their shareholdings and to enable some to hold that worth. The aim of listing on a stock exchange is never any longer to place cash into the enterprise but to form it imaginable to grab cash out of the enterprise."
This is the unique actuality. As Das states: “The persona of stock markets has been changed by alternative sources of wretchedness capital… [with] a shift to diversified kinds of enterprise possession, equivalent to non-public equity."
For the time being, many companies develop capital from venture capitalists, non-public equity customers and even prosperous folk. About a years down the road, these customers need an exit so that they'll form cash from their investment, and IPOs provide that exit.
Of direction, the amplify in affords for sale is also a characteristic of the fact that the stock market has long gone from energy to energy within the superb few years, thus encouraging promoters to offload their shares to the public, particularly retail customers having a peep to form listing day positive aspects.
Given the public fascination for IPOs, hundreds of VC-backed companies that barely form any cash and maintain wrong products and enterprise models maintain managed to promote their shares on the stock market at high costs.
Additionally learn: Startup IPOs maintain made a scorching comeback. Beware the optical phantasm
A predominant reason within the motivate of capital positive aspects made of the selling of shares being taxed at lower rates than diversified modes of earnings used to be to lend a hand retail and diversified customers to put money into IPOs and lend a hand entrepreneurs who are having a peep to hold new capital for enterprise expansion. But that barely appears to be happening.
So, it makes sense to continuously end the relatively light taxation of capital positive aspects made of shares. Indian coverage is already engaging in this direction. This earnings, adore what folk create as wage and from deposits, needs to be taxed on the marginal fee of earnings tax.
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