India's largest initial public offering (IPO) ended on a sour note as shares in mobile payments app Paytm tumbled 27 percent on the first day of trading. Meanwhile, regulators look to tighten rules relating to IPOs as stock market activity reaches fever pitch.
Indian super-app Paytm has seen its valuation plummet by more than a quarter following its market debut last week. The company raised $2.5bn following its IPO, the largest ever in India, which valued the company at $20nn. However, at the close of its first day of trading, the company had lost more than $5bn in valuation.
India has been going through a bit of an IPO frenzy in recent months, which has helped send the stock market in the country into overdrive. According to the Financial Times, India is one of the best performing among large Asia markets this year. For example, the SENSEX increased 11,885 points, or 24.89 percent, since the beginning of 2021.
Paytm is one of India’s big success stories of recent years, and has benefited from the strong growth of digital payments and e-commerce in the country. Initially developed as a payments service, the app has broadened its scope to include a range of other services, including e-commerce platform, bill payments, as well as other financial products.
Paytm was developed largely as an Indian version of Alipay and the latter’s parent company, Ant Financial, is among its shareholders, alongside the likes of Japanese investment firm Softbank.
When Paytm launched in 2010, it was one of the first big movers in mobile payments and was able to secure significant market share in the country. It was also one of the big beneficiaries of India’s demonetisation policy in 2016, which encouraged mass adoption of digital payment services as the government looked to remove all ₹500 and ₹1,000 banknotes from circulation.
However, over time the company has faced increased competition from several major international players, including Google, Walmart-owned Flipkart and Amazon. It has been reported that some investors have been concerned that the loss making app has yet to convince the market that its business model will bring sustained riches in the future.
In payments terms, however, there is significant market opportunity for growth in India. Mobile payments have advanced in the country in recent years supported by instant payments service Unified Payments Interface (UPI), which allows third parties to connect into it and move money between two bank accounts. UPI, which launched in 2016, has been a major contributor to digital payments growth in the country. In the full year to March 2021, UPI recorded 22bn transactions, up from 13bn two years previous.
Despite this growth, UPI appears to have only scratched the service of the market’s potential. For example, 22bn transactions is equivalent to just 16 transactions per capita. In Thailand, for example, whose instant payments service launched in early 2017, there were roughly 77 transactions per capita in 2020. If India’s UPI were to achieve similar levels, this alone would add an additional 84bn transactions.
E-commerce also continues to grow fast in the country. According to the India Brand Equity Foundation, e-commerce is expected to grow to $111bn by 2025, from $46bn in 2020, which suggests significant potential for all market participants including Paytm.
Regulating IPOs
As Paytm shareholders were discovering first hand that shares go down as well as up, the Securities and Exchange Board of India (SEBI) was issuing a consultation on proposed changes to rules around IPOs.
Among the rules proposed, the regulator is aiming to cap the amount companies can raise through an IPO for unspecified "inorganic activity", such as acquiring or strategic investments in new companies.
The regulator is concerned that “raising funds for unidentified acquisitions leads to some amount of uncertainty/ambiguity in the IPO objects”.
It is, therefore, proposing that a combined limit of up to 35 percent of a share issue can be used for inorganic growth initiatives and “general corporate purpose”.
SEBI also plans to to increase the lock-in period for anchor investors from 30 days to 90 days.
Anchor investors are typically marquee institutional investors who are allotted shares in a company ahead of its IPO. These investors were introduced to inspire confidence and show demand before the share issue.
For existing significant investors (i.e., those with more than a 20 percent stake in a company), SEBI is also proposing that they are limited to offering up to 50 percent of their shareholding for any public offering and that their remaining stake be locked in for a minimum of six months.
Although SEBI has focused on rules governing the seller of shares, the Reserve Bank of India in October sought to reduce risks in the financial system by tightening rules on the amount that can be borrowed for the purpose of acquiring shares.
The central bank will limit lending to IPO investors to Rs1 crore (£100,000) per borrower from April 1, 2022.