India has recently seen an ‘IPO boom’, with an increasing number of companies like Zomato going public, paving a path for all the firms listed to follow in their tracks within the next year or two. Byju’s, Flipkart, LIC, Nykaa, Paytm and UrbanCompany are just a few of the big names eyeing an IPO in this timeframe. At least 38 firms have penetrated the primary markets already – this is the highest in a decade. So what does this mean for the Indian economy?
The benefits of an IPO are not limited to just one company and its stakeholders. Going public highly boosts public image, which seems pivotal to heal wounds from a shaky economy and the virus-related lack of trust deterring India’s GDP growth this past year. The quarterly reporting requirement increases transparency and disclosure, helping tentative investors make informed decisions - instead of saving to avoid ‘risky investments’. Moreover, with all the capital raised through the IPOs, one can expect increased borrowing from banks – a sure-fire route to boosting economic recovery.
Interestingly, the names of the companies listed for IPOs this year are household names in innovation, a breath of fresh air in markets once dominated by ancient names that may have been collecting dust recently. The competitive innovation encouraged by these companies’ operations have improved the common man’s standard of living, bridging the gap between the possible and impossible. Rewarding this spirit of entrepreneurship with higher investment opportunities is possibly one of the greatest precedents to set a young, developing economy.
Furthermore, the unemployment rate currently sitting at 10.3% in urban India, while down from the previous quarter, will only see benefits from this IPO boom. Generally speaking, the increased scope of growing companies is vital for job creation. This is supported by a 2012 study by the Kauffman Foundation. The 2,766 US companies that went public from 1996 to 2010, all employed 2.2 million more people between themselves than they did before going public. Their sales too increased by more than $1 trillion. From a wider lens, it is impossible to note the injections into a circular flow with the general public being able to buy stakes in these small, but highly promising companies.
But how sustainable is this dreamy boom?
Certain barriers to going public stifle this prospective economic growth. SEBI places faith in derisking the investment process by creating eligibility criteria that, arguably, reduce companies’ innovation. SEBI requires tangible assets worth at least Rs 3 crore and a forecast of average operating profit of Rs 15 crore in the upcoming 3 years, without any operating loss. These are incredibly high expectations to have from smaller companies; achieving these goals might nip their competitiveness in the bud.
However, these prerequisites keep immature companies out, contributing to the trust and transparency that is, unequivocally, the basis of a successful capital market. That is not to say this is the only way to maintain this basis – Professor Arvind Panagariya of Columbia University suggested that qualified private entities do the screening for accuracy and completeness of data provided by the companies to prospective shareholders. This, combined with effective enforcement strategies, takes off the pressure of needing to meet such rigid prerequisites in order to prove their reliability, without the stubborn element of a unilateral method of proof.