Financial year 2017-18 was a milestone for IPOs. A record Rs 78,493 crore was raised through 188 IPOs, led by a resource-strapped GoI’s disinvestment drive. The current year promises to be an even better one with the proposed IPO of state-owned insurer LIC expected to raise around Rs 1 lakh crore. A gigantic public issue will naturally grab the headlines, but there’s another reason why we may be on the cusp of a big change. A clutch of internet IPOs are expected to hit the market this year.
IPOs are a proxy indicator of where the equity investor thinks the economic future lies. The bet is on an accelerated transformation to a digital economy, undergirded by a unique set of features such as network externalities and economies of scope. Last year, India added 12 unicorns, privately held startups with a value of over $1 billion. One estimate is that over $60 billion of private investment, largely from overseas investors, was channelled into India’s internet economy over the last five years. Now, with some of those startups having reached a certain size, many investors want to exit. An IPO boom of these startups can provide a fillip to the entire ecosystem as locked-up capital can be freed to look for future unicorns.
The excitement that pervades the Indian startup ecosystem is in contrast to India’s disinvestment programme. LIC’s IPO has been in the works for a while. It’s only this month that the necessary legislative changes for it have been notified. The size of the disinvestments can no longer mask their downside. India’s state-owned enterprises have been a channel for GoI’s spending off the balance sheet. To get a better return and provide these firms with a fair chance to compete in a fast-changing world, GoI needs to move faster and relinquish control entirely.
The common thread binding the two sides of India’s IPO market is the Indian household, the primary source of domestic saving. Retail savers are conservative. Bank deposits and insurance account for 52% and 24% of the total savings respectively. Mutual funds are the primary route to equities, where about 7% of the savings ends up. Going forward, GoI and financial sector regulators need to find ways to nudge more of the savings into equities. India’s startup ecosystem rests largely on the domestic economy. Domestic investors should benefit from it even as some unicorns build on their experience to expand overseas.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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