In a comprehensive study, the Securities and Exchange Board of India (SEBI) examined the investment patterns and behaviors of investors in initial public offerings (IPOs) listed on the main board between April 2021 and December 2023. The study, encompassing data from 144 IPOs, revealed several noteworthy trends.
Flipping Behaviour: The Propensity to Sell: The study found significant 'flipping' behaviour among individual investors, where they sold a substantial portion of their allotted IPO shares shortly after listing. Notably, individual investors offloaded 50% of their shares by value within a week of listing and a staggering 70% within a year. This trend highlights the short-term investment horizon and profit-taking mindset of many individual investors in the IPO market.
Disposition Effect: Selling Gains, Holding Losses: SEBI's analysis also uncovered a strong disposition effect among investors. Investors exhibited a greater propensity to sell IPO shares that posted positive listing gains compared to those that listed at a loss. When IPO returns exceeded 20%, individual investors sold a substantial 67.6% of their shares by value within a week. In contrast, only 23.3% of shares by value were sold when returns were negative, indicating a tendency to hold on to losing positions.
Returns Influencing the Selling Behaviour: The study found a direct correlation between IPO returns and investors' selling behavior. As IPO returns increased, individual investors exhibited a greater inclination to sell their allotted shares. This suggests that investors' decisions to sell or hold IPO shares are heavily influenced by the perceived gains or losses on their investments.
Post-COVID Surge in Demat Accounts: The study also highlighted a significant surge in the opening of demat accounts during the post-COVID period (2021-2023). Nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during this timeframe, indicating an influx of new investors into the IPO market.
Impact of Policy Interventions: SEBI's policy interventions regarding the Non-institutional Investor (NII) share allotment process and the Reserve Bank of India's (RBI) guidelines on IPO financing by Non-banking Financial Companies (NBFCs) in April 2022 had a notable impact on investor behavior:
1. Significant Reduction in NII Category Oversubscription: Oversubscription under the NII category halved from 38 times to 17 times after the policy changes.
2. Sharp Decline in Applications from 'Big Ticket NII Investors': The average number of applications from NII investors applying for more than Rs1 crore in IPOs dropped from approximately 626 per IPO to around 20 per IPO after the policy changes.
SEBI's study provides valuable insights into the investment patterns and behaviours of investors in the IPO market, highlighting the prevalence of flipping, the disposition effect, and the impact of policy interventions on investor participation. These findings can inform future regulatory measures and contribute to a better understanding of the dynamics within the IPO ecosystem.
