SEBI study finds strong disposition effect among IPO investors

New Delhi [India], September 2 : A study conducted by the Securities and Exchange Board of India (SEBI) found a strong disposition effect among investors, who displayed a greater tendency to sell shares from initial public offerings (IPOs) that recorded positive listing gains compared to those that listed at a loss.
The disposition effect refers to the tendency of investors to sell assets that have increased in value while holding onto assets that have decreased in value.
Given the increasing participation of retail investors and the heightened oversubscription in recent IPOs, SEBI undertook an in-depth study to analyse investor behaviour in IPOs.
The study covered data from 144 IPOs listed between April 2021 and December 2023.
Among its findings, SEBI observed "flipping" behaviour among individual investors. These investors sold 50 per cent of the shares allotted to them, by value, within a week of listing, and 70 per cent by value within a year.
The study also found that returns on shares influenced investor selling behaviour.
When IPO returns exceeded 20 per cent, individual investors sold 67.6 per cent of the shares by value within a week. In contrast, only 23.3 per cent of shares by value were sold when returns were negative.
Nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during the post-Covid period (2021-2023). A demat, or dematerialisation, account allows investors to hold shares and securities in an electronic format.
Following SEBI's policy interventions regarding the Non-Institutional Investor (NII) share allotment process and the Reserve Bank of India's (RBI) guidelines on IPO financing by NBFCs in April 2022, the study found a significant reduction in oversubscription within the NII category.
Oversubscription under the NII category halved from 38 times to 17 times, and there was a notable decline in applications from "Big Ticket NII Investors."
The average number of applications from NII investors applying for more than Rs1 crore in IPOs dropped from approximately 626 per IPO in the pre-policy period (April 2021-March 2022) to around 20 per IPO in the post-policy period (April 2022-December 2023).
India's IPO market witnessed a resurgence in 2024, with a total of 272 companies going public, compared to 164 during the previous fiscal year.
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public for the first time.