Does the tag ‘Largest IPO’ leads to its failure – The Case of Large Indian IPOs

MS. CHANIKA GOEL

Assistant Professor

In recent years, the failure of significant initial public offerings (IPOs) in India has drawn attention, particularly as the Indian stock market has changed and attracted more interest from both domestic and foreign investors. Numerous issues have caused difficulties for certain well-known initial public offerings (IPOs) in India. A mix of investor mood, market conditions, and the particular problems the companies themselves were facing can be blamed for these disasters. Investment bankers are a key player in IPO launch process, if an Investment banker thoroughly analysis the causes of such big IPOs failure they can refrain themselves from committing these mistakes in future. The following are some major causes of big IPOs in India failing or performing poorly:

1. Overvaluation of IPOs

The company’s overvaluation is one of the primary causes of big IPO failures. Investors may be hesitant to support an IPO if a company’s value is set too high in relation to its financial performance, growth prospects, or market conditions. The share price may decline and an IPO may fail if the stock fails to live up to investors’ expectations after listing.

For Instance

Zomato IPO (2021): Zomato stock price dropped below its issue price following the listing, despite the euphoria surrounding the company’s initial public offering. Concerns about the company’s high valuation and lack of profitability at the time of the IPO were partly to blame for this.

2. Market Conditions and Macroeconomic Factors

The performance of IPOs can be significantly impacted by broader economic factors like inflation, rising interest rates, geopolitical unrest, or financial crises. For example, a tighter liquidity environment brought on by inflationary pressures or a worldwide crisis may make investors more cautious.

For Instance

Life Insurance Corporation IPO (2022)- The biggest IPO of that time by a state owned company was listed at an 8.5% discount from IPO pricing due to unfavourable macroeconomic factors in 2022.

3. Market Sentiment and Timing

The general mood of the market has a significant impact on IPO success. The demand for new listings may be impacted if the market is in a slump or is exhibiting significant volatility. An IPO that is poorly timed during a market correction or crisis may result in low investor appetite and fall short of the issuing company’s and underwriters’ expectations.

For Instance

Paytm IPO (2021): Despite being one of the biggest in India, the Paytm IPO did not attract the anticipated level of investor interest. The shares price plummeted following listing, despite the issue being significantly oversubscribed. The IPO’s dismal performance was caused by a number of factors, including the high valuation, the downturn in market mood, and scepticism regarding its business plan.

4. Issues related to regulation and Corporate Governance

Regulatory and corporate governance concerns can have a big impact on investor trust. Any governance flaws in the business or worries about financial mismanagement may cause the market to view it negatively and affect the performance of the initial public offering. Investor trust declined as a result of criticism of certain big tech IPOs’ governance procedures, such as related-party transactions, management stability, or transparency problems.

For Instance

Hyundai IPO (2024): Hyundai IPO listed at around 1.62% discount on IPO price and further fell down by 5%. The probable reason for poor performance of country’s biggest IPO ever is the conflict of interest as the parent company of Hyundai also holds stake in other automobile company Kia Corporations and related party transactions. Over valuation is also one of the contributing factor.

5. Unclear Business Model or Pre Revenue Company-

When it comes to initial public offerings (IPOs) from businesses that are not yet profitable or have an unclear path to profitability, investors are typically more cautious. Businesses that depend significantly on investment but don’t demonstrate steady revenue or profit growth typically do poorly after going public as investor confidence declines.

For Instance

OYO Rooms (delayed IPO, rumoured issues): OYO’s prospective IPO was beset by difficulties because its business strategy was questioned and its route to profitability remained unclear. Even though the IPO hasn’t happened yet, the company’s financial difficulties have cast doubt on its prospects going forward, which may affect how well its offering does when it does.

6. Negative Investor Sentiment

Low investor enthusiasm can be caused by bad news or a lack of confidence in the company’s prospects for the future. A bad listing could result from the market’s doubts about the company’s capacity to make money or from strong market rumours.

For Instance

Yes Bank (2018): The Yes Bank’s financial troubles caused shares prices to drop during its first public offering (IPO) and follow-on public offers (FPO). Investors were concerned about the company’s unstable management and problematic financials.

7. Competition and Market Saturation

An IPO may occasionally be timed to coincide with intense competition or market saturation in a specific industry. An IPO may have trouble attracting investor interest if there are too many similar IPOs in a sector or if the companies are not sufficiently diverse from one another.

For Instance

VodaIdea IPO (2018): Even though Vodafone Idea is a big participant in the telecom sector, investor interest in its first public offering (IPO) was low due to fierce competition in the market and worries about its capacity to compete with more established firms like Jio and Airtel.

8. Investor Overhype and Speculation

Large initial public offerings (IPOs) can occasionally cause excessive enthusiasm and speculation, which can result in overblown expectations. The stock price may decline after listing if the company’s actual performance falls short of these elevated expectations.

For Instance

DLF IPO (2007): During its listing, the DLF IPO, one of the biggest real estate IPOs in India, encountered a volatile market. Despite raising money successfully, the IPO encountered difficulties after listing because of speculation in market and regulatory constraints.

Conclusion

Large initial public offers (IPOs) in India can fail or perform poorly for a variety of reasons, but the general state of the market, the company’s core competencies, and investor sentiment are important determinants of these offerings’ success. Indian IPOs’ valuations, governance procedures, and profitability have come under more scrutiny in recent years, particularly in industries like technology and E-Commerce. At management schools offering PGDM courses like JIMS Kalkaji, it is very important to incorporate the case studies of failure of such big IPOs so that students who will be future Investment banker and Analysts can learn from their mistake. Even at graduate level, the management students should be taught the same.