It was just another Monday for the stock markets, but for online food delivery major Zomato, July 25, 2022 turned out to be a day of reckoning. Its stock price fell over 14 per cent during the day’s trade to touch a low of Rs 46. It had listed at Rs 76 last year. So, what happened?
The crash was triggered by the fact that the digital platform’s stock had completed a year of listing, and hence, the lock-in period for its pre-IPO shareholders had come to an end. As per the guidelines of markets regulator Securities and Exchange Board of India (Sebi), all investors who buy a company’s stock through pre-IPO placements and anchor allotments are subject to certain lock-in periods—such as a month for anchor investors, and a year for pre-IPO shareholders—following the expiry of which, eligible shareholders can sell their holdings in the open market.
Incidentally, Zomato’s shares had tanked over 10 per cent during intra-day trade on August 23 last year when the one-month lock-in period for its anchor investors came to an end. This assumes significance as ride-hailing giant Uber exited Zomato on August 3, 2022, by selling its entire stake of 7.8 per cent held by its group entity Uber B.V. in a block deal worth nearly $400 million.
But it’s not only about Zomato. Last year was a stellar year for IPOs as a total of 63 companies launched their public issues to raise a record Rs 1.2 lakh crore—the highest in a calendar year.
Since many companies listed on the bourses in the second half of last year, the lock-in periods of their pre-IPO shareholders are set to expire soon. That, in turn, could intensify the selling pressure on the companies’ equities amidst the weak outlook and ongoing volatility.
The focus will be on online majors like Paytm, Policybazaar, Nykaa and CarTrade Tech, among other tech companies, as they commanded massive valuations before their IPOs. But barring Nykaa, most of them have seen their share price crash following their market debut.
Among the start-ups that got listed last year, only Nykaa has managed to stay above its issue price of Rs 1,125, even as shares of Paytm and Policybazaar are down over 67 per cent and 52 per cent, respectively, from their issue prices.
“The latter half of 2021 saw tech-platform companies ruling the roost. The majority of them had no profits, and hence were valued at multiples of revenue or gross merchandise value (GMV),” says Arun Kejriwal of Kejriwal Research & Investment Services.
“Taking Zomato’s example, [investors should] expect other similar tech-platform companies to face shareholder panic when their lock-in expires. It is quite likely that with market price being half, or even lower compared to the issue price, investors could rush to sell and realise whatever [return is] possible. While the share prices are substantially lower, it does not mean every investor is selling at a loss, simply because most of these allotments were made at substantially lower prices, and the issue price was ramped up when they tapped the capital market,” he explains.
This assumes significance as, in the case of Zomato, the average cost of acquisition for Info Edge (India)—a pre-IPO shareholder of the company—was only Rs 1.16 per share. In other words, it would still make a huge profit if it decided to sell its holding at the prevailing market price.
Again, Zomato is not alone. A close perusal of the disclosures made in the draft document of digital companies that went public last year shows that each of them has private equity (PE) and venture capital (VC) shareholders who acquired shares prior to the IPO at a fraction of the issue price. More importantly, all these PE/VC shareholders will soon be able to sell their shares in the open market.
Sample this: In the case of Policybazaar that listed on November 15 last year, SoftBank’s arm SVF Python II (Cayman) acquired shares at an average price of Rs 289.95 while the issue price was fixed at Rs 980—a premium of nearly 238 per cent compared to the average price of acquisition. Its share closed at Rs 459.50 on July 28.
Similarly, in the case of Paytm, SAIF III Mauritius Company acquired its shares at Rs 15.40 while Elevation Capital V FII Holdings bought them at Rs 77.70. The acquisition prices for SAIF Partners India IV at Rs 305.60; Elevation Capital V at Rs 441.80; and Alibaba.com Singapore E-Commerce at Rs 583.40 were also much lower than Paytm’s issue price of Rs 2,150. The company’s shares closed at Rs 715.70 on July 28.
In the case of Nykaa, which is a profitable start-up, entities like Lighthouse India Fund III and Lighthouse India III Employee Trust acquired its shares at Rs 76.65, and saw the value of their investments jump nearly 15 times when the issue price was fixed at Rs 1,125. Its closing price was Rs 1,400.95 on July 28.
Simply put, the PE/VC firms may still sell their holdings once their lock-in expires, even if the market price is below their respective issue prices as they would still be making a decent profit, while investors who bought shares during the IPO would be reeling under heavy losses.
For instance, shares of Paytm may well be trading over 65 per cent lower than its issue price but SAIF III Mauritius Company could still see its investment swell nearly 44 times.
According to market participants, while online majors could see heightened selling pressure with the lock-ins coming to an end, other companies that listed last year could also meet a similar fate as their pre-IPO investors would be looking to book profits.
The coming months will see the one-year lock-in period ending for companies such as Windlas Biotech, Nuvoco Vistas, Krsnaa Diagnostics, Glenmark Life Sciences, Aptus Value Housing Finance and Chemplast Sanmar, among others. All these shares are currently trading below their respective issue prices and pre-IPO shareholders may partially offload their stakes to cut losses.
That’s not all. Even companies like Devyani International and Rolex Rings that are nearing the first anniversary of their listing and trading above their listing price could see sell-offs, even while doing well in a dull market.
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