Diwali: India's record IPO rush

Hyundai Motor India raised ₹27,870 crore ($3.3 billion) this Diwali season, the largest IPO in the country's corporate history. It capped a rush of listings that has kept Mumbai's bankers busier than at any time in memory.

The deal overtook the flotation of Life Insurance Corporation in 2022, the previous record. Every rupee of it came from an offer for sale by the South Korean parent, Hyundai Motor Company, which kept a large majority of the Indian subsidiary. The company itself raised nothing new. Demand was uneven: large institutions bid heavily, the retail portion was not fully subscribed, and the shares began trading below their offer price.

The business being sold is a strong one. Hyundai is India's second-largest carmaker by sales after Maruti Suzuki, with a lineup weighted towards the sport-utility vehicles that Indian buyers now favour. The timing is less comfortable. Passenger-car sales have slowed this year, dealers have complained about swollen inventories, and the Indian unit pays its Korean parent a royalty for technology, a cost that some investors cited as a reason to hold back.

Can the market swallow it all?

Steady inflows to domestic mutual funds and heavy retail buying have given India a big appetite for new shares. Promoters and foreign parent companies have used it to sell stakes at rich multiples. The pace of issuance is now starting to test liquidity in the secondary market. When new offerings soak up money faster than households save it, the main indices tend to stall while the market digests the supply.

Where the money goes

The structure of the Hyundai deal shows why supply matters. In a primary issue, cash raised goes to the company and is usually spent on factories or paying down debt inside India. In an offer for sale, the money goes to the selling shareholder. When that seller is a foreign parent, the proceeds can leave the country altogether. Indian savers handed over ₹27,870 crore of their savings, and in return received shares that were already in existence. The domestic pool of money available to buy other listed shares shrank by that amount on the day of allotment.

Much of this year's issuance has taken the same form. Private-equity funds, venture investors and foreign parents have treated India's buoyant market as an exit, selling stakes at valuations that would be hard to match elsewhere. That is a rational response to high prices, and it tends to accelerate at precisely the point when prices are highest.

The domestic bid

The buyers are mostly Indian. Monthly contributions to systematic investment plans, the standing orders through which households buy mutual funds, have set record after record this year. Retail brokerage accounts have multiplied since the pandemic, and speculative trading in options grew so fast that the Securities and Exchange Board of India tightened its rules for derivatives this autumn. Domestic funds have become large enough to absorb heavy selling by foreigners, which is just as well: foreign portfolio investors sold Indian shares at a record pace in October.

That selling explains some of the recent strain. The Nifty 50 reached a record high in late September and then had its worst month since the pandemic crash of 2020, as foreign money rotated towards China after Beijing's stimulus and as quarterly earnings disappointed. Heavy primary supply arriving into a falling market is a harder test than the same supply arriving into a rising one.

Lessons from earlier booms

India has seen this pattern before. In January 2008 Reliance Power's flotation drew enormous demand and set a record, then listed below its offer price; the market peak had already passed. In November 2021 Paytm, then the largest Indian IPO, fell by more than a quarter on its first day of trading, and the new-issue boom of that year faded soon after. In both cases record-sized deals arrived near the top of a cycle, because that is when sellers can get the best prices.

The case against reading too much into the parallel is that India's savings base is far larger than in 2008 or 2021. Household money now flows into equities every month through automatic plans, rather than in bursts driven by speculation. Some offerings this year have done very well, such as Bajaj Housing Finance, which more than doubled on its debut in September. The domestic bid is deep enough to prevent a collapse. It is less clear that it is deep enough to keep indices rising while absorbing billions of dollars of new supply each month.

Winners and losers

Investment bankers, stock exchanges and selling shareholders are the obvious winners. Hyundai's Korean parent gets cash at a far higher earnings multiple than its own shares command in Seoul. The likely losers are holders of mid-cap and small-cap stocks, where valuations are highest and liquidity thinnest. When money is diverted into new issues, it is these shares that feel the drain first.

There is a quieter cost for companies that want to raise money for investment. If investors grow weary of new paper after a run of secondary sales by departing owners, firms that need fresh capital for factories, power plants or roads may find the window narrower and the price higher. A boom in exits can crowd out the issues that would actually add to India's capital stock.

What to watch

The pipeline remains heavy. Swiggy, the food-delivery firm, is due to open its offering next week, and bankers expect more large deals before the end of the financial year in March. The indicators to watch are monthly mutual-fund inflow data, the balance of foreign buying and selling, and how new listings trade in their first weeks. A string of listings below their offer prices would be the clearest sign that supply has run ahead of demand.

The IPO boom shows how deep India's domestic savings pool has become. If the pace of listings holds, it will probably drain enough money from existing shares to cap the main indices over the coming months. Expect the Nifty to struggle to regain its September high before the spring, with smaller companies taking the heavier losses.