The Securities and Exchange Board of India (SEBI) has recently highlighted a common trend among investors in the initial public offering (IPO) market, where many investors quickly sell their shares after the IPO is listed. According to SEBI’s study, titled “Analysis of Investor Behaviour in Initial Public Offerings,” which was conducted by the Department of Economic and Policy Analysis, about 54% of IPO shares, by value, were sold within the first week of listing. This indicates a strong tendency among investors to exit their positions soon after the IPO hits the market.
The study found that individual investors are particularly prone to this quick exit. Approximately 50.2% of shares allotted to individual investors were sold within the first week. Breaking this down further, non-institutional investors sold 63.3% of their shares by value, while retail investors sold 42.7% of their shares within the same period.
SEBI also observed a behavioral pattern known as the “disposition effect.” This term refers to investors’ tendency to sell IPO shares that show positive gains soon after listing, rather than holding onto them. The study revealed that individual investors sold 67.6% of their shares by value within a week when their returns exceeded 20%. However, when returns were negative, only 23.3% of shares were sold within the same timeframe.
In contrast, mutual funds showed a much longer holding period for IPO shares, selling just 3.3% of their allotted shares within a week. Banks, however, were much quicker to sell, offloading approximately 79.8% of their shares within the same period.
Geographically, the study revealed that 39.3% of retail investors participating in IPOs were from Gujarat, followed by Maharashtra with 13.5%, and Rajasthan with 10.5%. The study also noted a significant increase in the number of demat accounts opened after the Covid-19 pandemic, with nearly half of the total IPO applications being associated with accounts opened during this period.
Half of the companies listed on mainboard exchanges in 2024 saw their stock prices fall below the listing day closing price within a month. This decline was due to investors quickly selling shares for short-term gains. While average IPO listing day gains remained steady at around 27% in both 2023 and 2024, the overall performance of these companies in the first month of 2024 has worsened compared to the previous year.
This analysis sheds light on the behavior of different types of investors in the IPO market, showing how individual investors, mutual funds, and banks approach the sale of IPO shares differently. It also highlights the geographical distribution of retail investors in India and the impact of the post-Covid period on investor participation in IPOs.
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