Listing Gains Trump Tax Hike: Get-Rich-Quick Investors Will Continue To Chase IPOs

The great Indian initial-public-offering party is showing no signs of ending. Even an increase in short-term capital gains tax to 20% from 15% might not stop investors who apply to the IPOs, hoping for a quick gain, say experts.

“I do not foresee any significant impact of the increased tax on investors’ participation on IPOs. There might be some tempering as several investors also borrow to invest in IPOs. But in my view, it is not enough to move the needle,” opines Pranav Haldea, managing director of Prime Database Group.

The reason is simple — listing gains of fresh companies remain delicious, even net of increased tax. As per a recent Bank of Baroda report, as many as 89 IPOs were listed in the financial year up to July 12, 2024. Of these, 80 IPOs listed at a premium, seven were at a discount and two listed at the issue price. As many as 37 IPOs listed at a premium of over 50%, allowing more investors to bet on the listing game.

The tax increase does not impact investors amid such sparkling gains. "It might impact to some extent but people looking for listing gains are more concerned with outsize gains they would make from listing and STCG comes much later in the scheme of things for them," says Abhishek Kumar, founder and chief investment adviser at SahajMoney.

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Quick-Gain Hunters Won't Stop

Christy Mathai, fund manager-equity at Quantum Asset Management Co., says that the 33% increase in the short-term capital gains does look steep and will take a knock-on expected gain.

"But the key motivation IPO subscribers stated here is listing gains and as long the markets are vibrant, such behaviour would continue. Only when subscribers start seeing losses would the frenzy behind listing gains will reduce. I doubt (an) increase in short-term capital gains tax will have (a) major impact on listing gains speculations," Mathai adds.

The IPO investments yield better results than secondary-market returns, as per a theoretical exercise by Bank of Baroda. "It may sentimentally affect for short term but the way the long-term outlook of the equity market remains positive, it will not change or affect IPO Investors or any other investors who are looking for quick returns to invest or subscribe in IPOs," says Devang Shah, head of retail research at Asit C Mehta Investment Intermediates.

The stage for high listing gains was set in the financial year 2024 bull run. A few new debuts gave stellar gains — Tata Technologies Ltd. at 163% and Vibhor Steel Tubes Ltd. topped the numero uno spot at 193%. The average listing gains rose to 29% in the last fiscal, as compared to a mere 9% in fiscal 2023.

"Stocks of good companies have continued to perform strongly post-listing in spite of many IPO investors booking gains on their investment. That's because there have been other investors waiting to get in via the secondary market," says Sunil Shah, group chief executive officer and director at Khambatta Securities.

Also Read: Sanstar Shares Debut At 15% Premium Over IPO Price

More Than Half IPO Investors Flip-Traders

Markets regulator SEBI has pointed out earlier that a lot of investors are in the IPO game for a very quick buck. SEBI Chairperson Madhabi Puri Buch has shared early this year that as many as 69% of non-institutional investors or high-net-worth individuals and 43% of retail investors flip trades within a week of an IPO listing.

The same in a month’s span rises to 76% of NIIs, and 52% of retail investor, she added, insisting that IPO market is one for traders more than investors. Most investors now track grey market premium before applying for an IPO.

“Most retail investors do not invest in IPOs on the basis of performance of the company or the sector…They come in for listing gains of which there is a high chance in bullish markets,” says Haldea.

Also Read: Akums Drugs Sets IPO Price Band At Rs 646–679 Apiece

Clarity For Promoters' OFS

Even as the Union Budget 2024 looks at reducing speculative activity with measures on futures and options, and more such, it has a good move for promoters going in for public issues.

"It is proposed to provide for a method of calculation of fair market value on 31.01.18 under section 55(2) (ac) in the case of sale of unlisted equity shares in an offer for sale in an initial public offer," Finance Minister Nirmala Sitharaman said in her budget speech.

According to Vishal Yeole, senior director of business advisory at Waterfield Advisors, the budget has added clarity to capital gains taxes for share sale in the OFS segment.

"Earlier, the capital-gains-tax computation for (the) OFS has been in a grey area. Now, it's been said in black and white that the cost of shares is adjusted to cost inflation index up to 2018. The government saw through the issue, which has led to many litigations. Now, promoters can go in for (the) OFS without the fear of retribution from the taxman," Yeole adds.

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.

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