Banks Opt for Quick Gains in IPO Market, Selling Shares Within Days of Listing
In the bustling IPO market, banks are increasingly pursuing short-term profits by rapidly offloading their allotted shares. A recent report from the Securities and Exchange Board of India (SEBI) reveals that nearly 80% of banks sell their IPO shares within the first week of listing, capitalizing on the initial surge in share prices.
According to the SEBI report, between April 2021 and December 2023, 75% of IPOs saw positive returns on their listing day. Notably, 26 IPOs experienced returns exceeding 50% on Day 1, attracting banks and investors eager to realize immediate gains. This trend reflects a broader appetite for short-term profits, with retail investors also selling off more than half of their shares within the initial week.
Banks, typically known for their stability, are increasingly engaging in these short-term transactions. “Banks often aim to churn their portfolios and book profits on equity exposures where they are not strategic investors,” said Vivek Iyer, partner at Grant Thornton Bharat. He explained that trading desks in banks are geared towards profit booking for tactical investments, hence the observed trend.
Foreign banks, known for their cautious approach, generally avoid such speculative activities. In contrast, domestic banks usually adhere to strict limits, often capping equity investments at 5% or less. This regulatory environment, combined with the high demand for IPOs—92 of which were oversubscribed more than ten times during the reported period—provides banks with ample opportunities for short-term gains.
Ashvin Parekh, managing director at Ashvin Parekh Advisory Services, noted that banks make these decisions based on commercial considerations. “IPOs offer a chance to deploy money for short periods, providing a lucrative opportunity for quick profits,” he said.
In addition, some banks leverage their corporate relationships with IPO-bound companies, offering working capital or credit lines. This short-term equity position helps bolster the company’s market debut while allowing banks to benefit from the immediate demand and potential listing gains.
Conversely, mutual funds take a longer-term approach. According to the SEBI report, mutual funds sold only 3.3% of their allotted shares over the same period. Ashvin Parekh explained that mutual funds are fiduciaries managing investors' capital, and thus, they focus on long-term potential rather than immediate returns. “Mutual funds are not driven by short-term gains; instead, they seek to hold positions that offer long-term value,” he said.
The rapid selling by banks has sparked concerns. Ajay Bagga, a banking and stock market expert, raised questions on social media about the propriety of banks investing in IPOs for quick gains. “Why are banks engaging in IPOs and chasing listing gains? Have these practices been approved by the Reserve Bank of India?” he questioned.
The discussion underscores a growing debate about the role of banks in the IPO market and their pursuit of short-term profits at the expense of long-term stability and regulatory oversight.
