Last year was a record-breaker for the Indian IPO market, with more than 60 companies raising almost USD16 billion, the highest amount ever raised in a single year. But high IPO valuations took a toll on retail investors, with several of those listed companies today trading at well below their offer price.
Among these, the biggest disappointment was Paytm’s parent company, One97 Communications, the share price of which has plunged almost 70% since listing.
So it is little wonder that the capital markets regulator, the Securities and Exchange Board of India (SEBI), felt the urge to step in and introduce a slew of changes aimed at tightening the framework governing IPOs. The 90-day lock-in period for anchor investors, which comes into play on 1 April, is one of several key adjustments.
Accordingly, 50% of investments by anchor investors in public offerings will have a 90-day lock-in period, while the current 30-day lock-in period continues to apply on the 50% balance of shares held.
Since price fluctuations are common at the end of a lock-in, with stocks typically under pressure due to the exit of anchor investors, “a protracted anchor lock-in is intended to provide confidence and stability to the market”, says Abhishek Dadoo, a partner at Khaitan & Co in Mumbai.
Paytm’s debut underlined this pressure once anchor investors withdraw. On listing it fell 9% to INR1,950 (USD25.70) against the issue price of INR2,150. But when the mandatory one-month lock-in period ended on 15 December 2021, the share price plunged 13% as anchor investors exited. These anchors included such top sovereign wealth funds and institutional investors as Abu Dhabi Investment Authority, Canada Pension Plan Investment Board, Singapore’s GIC, Alkon Capital and BlackRock.
Anchor investors, often referred to as cornerstone investors, are allotted shares just prior to the opening of an IPO for subscription. As they are given confirmed allotment of shares, they are bound by a lock-in period, currently fixed at 30 days. These institutional investors could include mutual funds, pension funds, insurance companies and the like.
But there were just too many anchor investors seeking to exit over-valued stocks in a market where retail investors did not necessarily have adequate buying power, according to one merchant banker. He advised that, given current market conditions, it was best not to invest in IPOs, but pick shares from the secondary market when stock prices self-correct, as anchor investors were desperate to exit.
An Edelweiss Alternative Research report identified that of 41 issuances between January and October 2021, there was selling pressure on 31 of them as the 30-day lock-in period for anchor investors ended.
“Opening the floodgates slowly by permitting sale of shares in stages by anchor investors would ensure lower volatility and repose greater trust in upcoming IPOs,” says Dadoo. “New lock-in rules would provide greater price stability in the short term.”
Among those likely to benefit from the tightening of regulations for IPOs is Life Insurance Corporation of India’s proposed INR630 billion public share offer, touted to be India’s largest initial share offering, as the government intends to sell a 5% stake. The IPO was expected to be launched in March, but was delayed due to market volatility amid Russia’s invasion of Ukraine.
Yet while most lawyers agree that the extended lock-in period would be a win-win situation for all concerned, Dadoo says there is a strong possibility that the extended 90-day lock-in period will disincentivise certain anchors looking to exit early. “But at the same time, it also ensures lower price volatility, which ultimately is beneficial for an exit.”
Given recent market volatility, especially in the prices of new-age tech IPOs, some action on the part of the SEBI was anticipated, says Mumbai-based Ratnadeep Roychowdhury, who leads the private equity and M&A practice at Nishith Desai Associates. “It may have some impact on funds, which have an extremely short duration mandate,” he agrees. However, it is unlikely to have a material impact only on its own.
It might be argued that extending the lock-in period for anchor investors is unnecessary, given the increasing sophistication of the Indian market. But considering increasing retail participation and the SEBI’s historic stance towards “hot” money, Roychowdhury says revising the lock-in period “was not unexpected”.
The Briefing is written by Freny Patel.
