The complexity of new financial models and AI-based games, as well as adventurous retail investors are a strong argument in this direction.
By CKG Nair & MS Sahoo
Conventional wisdom tells us that securities markets allow individuals to participate in business growth by investing in equity. Our enthusiasm for socialism and our political affinities with “little” people have prompted us to reserve some of this growth for retail investors (RII). IIRs need special care and protection; otherwise, the company’s growth story would bypass them. It is also assumed that such egalitarian principles can be effectively grafted on to alter the behavior of financial markets. Interestingly, there is no such faith or practice in any other major securities market jurisdiction.
Armed with such faith, SEBI Issue of Capital and Disclosure Regulations [ICDR] reserve 35/50% [depending on whether pricing of the issue is on book-built or fixed methodology] of public issues for the RIIs. People applying for securities not exceeding Rs 2 lakh are classified as RII.
IPOs in India follow the pattern of floods and droughts. When all is well, it’s like a flood. In addition to fundamentally sound companies, several others are joining the bandwagon. In times of drought when stock indices plunge, rarely does a company have an IPO plan. The economy and stock indices do not have to move in tandem. Some sectors and subsectors perform quite well most of the time, reflecting a strong disconnect between the economy and IPOs.
Recent IPO trends, however, are unprecedented. Indian and global economies are reeling from the pandemic. However, stock markets, including IPOs, are booming everywhere. Since the indices are on a roll, the number and size of IPOs has been unprecedented in India, with 63 companies raising nearly Rs 1.2 lakh crore in 2021, compared to around Rs 6,000 crore in 2011. he scale of money raised by a few new companies’ age, average issue size, retailer participation, etc., are also unprecedented. While the media is inundated with talk of stock market bull run, IPO rush, performance and perils of various IPOs, etc., the question we explore, a priori, is if the RIs take advantage of it to justify the continuation of the regulatory boost. . As with previous high IPO episodes, the empirical response is ambiguous, with some new IPO certificates doing well, but many hesitant.
So what’s up ? Many. According to Joseph Schumpeter, an entity can be evaluated based on its structure, behavior and performance. And these attributes vary over time due to innovations. In recent times there have been paradigm shifts in the structure, conduct and performance of businesses. The revolutionary changes in ICT have created modern organizations with very different structures and characteristics from the past. E-commerce and networking entities with low asset consumption are clear examples. Their practices and behavior are also quite different from those of traditional companies. By focusing on valuation by attracting venture capital and, sometimes, public capital, or through hostile takeovers and aggressive acquisitions and the continuation of the broiler chicken model, they are too quick for most retail investors can even guess, forget to understand. When it comes to performance, many such entities suffer huge losses, but are still valued at billions of dollars. Any explanation in terms of future benefits is also dangerous as the longevity/life cycle of many of these entities is short and uncertain with the prey-predator model of hostile takeovers.
Coupled with changes in the structure, conduct and performance of businesses is the whirlwind nature of the secondary market. The IPO price does not help investors; milking the cow with generally nothing left to the calf is the general practice of transmitters. Quotation days are either festivals or mayhem. Institutional and high net worth investors are playing the game using algos and leveraged money available to them at a very low price in these times of flooding liquidity. Given their financial and technological sophistication, other investors fall victim to either exuberance or desperation, sometimes oscillating between the two within minutes. Such extreme volatility and the resulting risks and uncertainties are too foreign to IRIs. They are completely crushed and crushed under his weight.
While traditional retail investors are being severely impacted by the conduct of tech-driven companies and tech-based stock trading, a new brand of investors – mostly individuals, with around 5 million new demat accounts created in the past six months, who wear a devil-indifferent attitude on their sleeves—have also entered the fray. They are willing to bet on anything, especially sky-high “things” like cryptos and are willing to use third-party algos that multiply. For them, investing is like bungee jumping and other high adrenaline adventure sports. They are less concerned with investor protection; rather, they scoff at such feeble efforts by regulators.
Given these new developments in financial markets – new-age paradigm-shifting companies, their short life cycles, the rapid growth of algorithmic and high-frequency trading, and the emergence of adventurous investors – it is time that retail investors be freed from the promises implicit in IPOs. Regulatory safety nets and retail quotas, or even simple nudges, create a false sense of security, a kind of moral hazard. Caveat emptor may be better advice. On the contrary, the regulator must protect and promote market integrity with renewed vigour.
Respectively, Director, National Institute of Securities Markets, and Distinguished Professor, National Law University, DelhiViews are personal
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