Blasé Capital BIG -TICKET IPOs

A few days ago, the new minimum public shareholding (MPS) rules for listed firms were announced. They may prove to be a huge boon for mega IPOs (Initial Public Offerings) that are slated to hit the market this year, and the subsequent ones. For the firms, according to a media report, they will make the “Indian markets more attractive for large, high valuation companies by reducing the urgency to dilute more stake(s),” and go ahead with lower-than-expected dilutions. For potential investors, they will enable them to easily handle their investable cash, or surpluses from sales of a part of existing portfolios. It is, according to several analysts, a win-win for the stock markets. Some of the firms that will benefit include Reliance Jio, which hopes to launch an IPO in the first half of 2026, National Stock Exchange (NSE) which got a green light from Sebi after more than a decade, and Flipkart which recently shifted its “legal domicile” from Singapore to India.

To understand the new MPS norms, and how they will operate, one needs to figure out the dynamics of IPOs that are launched by firms that are likely to get massive valuations. For example, according to a media article, Flipkart may be valued at INR6 lakh crore, NSE at INR7 lakh crore, and Reliance Jo at a mouth-watering INR12-16 lakh crore. The high valuations create problems. For the firms, a dilution of 5-10 per cent can imply inflows of INR30,000 crore to INR3 lakh crore. Raising such mega bucks from the investors, even the global institutions, is a headache. For the potential investors, this implies sinking huge sums into the IPOs, which limits the benefits from other existing and future opportunities. But if the high-valuation IPO firms are allowed to dilute 1-2 per cent, the calculations become easier for the offerors and buyers.

Before the new MPS norms, firms with potentially large valuations of more than INR5 lakh crore had to dilute a minimum of five per cent of the equity capital. The rules for those between INR1 lakh crore and INR5 lakh crore were the same. Now, the former need to dilute a mere one per cent, and the latter only 2.75 per cent. For firms with post-IPO valuations of INR50,000 crore to INR1 lakh crore, the minimum dilution is eight per cent rather than the earlier 10 per cent. Thus, the IPO sizes will be much smaller, as less stakes will be available for purchases if the firms decide so, which will make the IPOs more manageable for the firms, and buyable for the investors, who can buy smaller lots. In effect, IPOs will become more exciting, as the fears that the market may not be able to absorb a large supply of shares recede.

According to AI-linked search, “The revised rules, designed to prevent significant price drops (due to price overhangs) from massive, immediate share dilution, encourage more large companies to list, increasing investment opportunities.” Price overhangs stem from a possibility, even anticipation among investors, of downward pressures on stocks due to large supply of shares in the market. For example, if firms need to dilute larger percentages, the number of shares available to be sold immediately after the IPOs to benefit from listing surges increase, and create bearish pressures. The same happens when investors, who are locked in due to regulations, can sell. According to some, “The expectation of this selling pressure can drop the stock price even before the shares are sold.” This is why regulators, including Sebi, have phased listing norms with initial MPS that increase gradually. Lower MPS norms, like one per cent for high-valuation firms, result in less shares being available for sale in the secondary market.

“Global giants and massive Indian firms that were hesitant to list due to strict rules may now find the Indian market more attractive. Since companies are not forced to flood the market with shares immediately, the stock price of a new listing might be more stable. Since these companies will need to sell more shares over 5 to 10 years to meet the 25 per cent rule, you (investor) will have multiple chances to buy into these companies through ‘follow-on public offers’ or ‘offer-for-sale’ events in the future,” explains an article on an IPO-related website. According to the new norms, like the older ones, all IPOs need to reach 25 per cent public float. The time for the large valuation firms is now 5-10 years, which gives them sufficient time, and multiple chances to do so. As mentioned by the website, it provides several later opportunities for the investors, who may have missed the initial IPOs.

According to the IPO-related website, there was a suggestion to cut down the retail portion in IPOs from 35 per cent to 25 per cent. The rationale was that this will aid the entry of the large institutions in a bigger way, and provide more credibility for the IPOs. However, the public feedback was against the change, and the regulator agreed to retain it at 35 per cent to keep the retail opportunities intact.