Indian Companies Shrink IPO Sizes As Investors Take A Closer Look At Valuations

Several companies preparing to enter India’s primary market are reducing the size of their initial public offerings as issuers respond to changing investor appetite and greater scrutiny of pricing. Juniper Green Energy, Shiprocket, Laser Power & Infra and Indo-MIM are among the recent issuers to cut their proposed issue sizes.

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The changes indicate that companies are increasingly adjusting the amount they plan to raise when demand at their targeted valuation is not strong enough to support a larger offering.

Issuers Weigh Fundraising Against Valuation

Madhurima Mukherjee, Partner at JSA Advocates & Solicitors, said investors are placing greater emphasis on profitability, business fundamentals and the ability of companies to withstand operating challenges.

She said companies facing weaker-than-expected demand at their preferred valuation generally have two choices: reduce the valuation or lower the number of shares being offered. Cutting the issue size allows an issuer to retain its targeted pricing when investor interest exists but is concentrated among a smaller group.

The approach is more useful when demand remains fundamentally intact but lacks the depth required for a larger issue. It does not, however, address situations where investors consider the proposed valuation significantly higher than what they are willing to pay.

Fresh Issue And OFS Face Different Pressures

Effects of a smaller IPO may be different depending on whether the smaller size is due to the fresh issue or OFS part.

Companies may be reluctant to cut the fresh issue because the proceeds are intended for business requirements such as expansion, debt repayment or other corporate purposes. Existing shareholders, on the other hand, may have more flexibility to reduce the OFS component if market conditions do not support their expected exit valuation.

The decision therefore depends not only on investor demand but also on how the company intends to use the money raised through the IPO.

Subscription Risk Remains A Concern

Mukherjee said the immediate concern associated with an IPO size reduction is usually the risk of weak subscription. Under Sebi rules, an IPO’s fresh issue must receive at least 90% subscription. If that threshold is not met, the subscription money has to be refunded and the offering effectively fails.

Institutional investors also provide feedback on valuations during company roadshows. Their response gives issuers an indication of the level of demand available at the proposed price and can influence the final structure of the offering.

Reducing the number of shares on offer can therefore help companies manage subscription risk while retaining their intended pricing strategy.

Smaller Issue May Not Fix An Expensive Valuation

The smaller size of an IPO will not solve all the issues related to pricing. In the case that institutional investors do not consider the value of the company as an acceptable one, reducing the quantity of shares offered may not be sufficient to create adequate interest.

The issue size cuts in most of the recently conducted IPOs suggest that we have a primary market where investors become more discriminating in terms of what price they would like to pay.