The recent correction in stock markets and continuing volatility could hamper the share sale plans of investors who want to exit recently-listed companies after their lock-in period ends. The shares are primarily held by pre-IPO investors, including promoters, private equity firms and anchor investors.
The lock-in periods of 90 companies will be lifted between February 18 and May 31, which will potentially free up shares worth nearly $42 billion, for sale.
Estimates are based on shareholder analysis for firms listed up to February 17, according to Nuvama Alternative & Quantitative Research.
On the block
The six-month lock-in of Swiggy, for instance, ends on May 13 making 1,897 million shares available for trading. As on Friday, its share price was down 7.6 per cent from the IPO offer price of ₹390. The one-year lock-in for 5,291 million shares of Bajaj Housing Finance ends on April 15. It is trading 66 per cent higher than its issue price of ₹70 but 38 per cent lower than its 52-week high.
“The current market price of many PE backed companies that listed a year ago are significantly lower than their listing price. Investors are unlikely to sell large stakes in a bearish market at significantly lower prices when the lock-in period ends,” said Vivek Soni, Partner and National Leader – Private Equity Services, EY India.
Nearly half of the 102 companies that made their debut since the beginning of last year are trading in the red, according to data from PRIME Database.
Selling now could imply selling at losses or at prices much below the highs. In the absence of adequate demand, large share sales could also push down prices further. The other alternative would be to hold on to the shares and wait for market conditions to improve before exiting.
“There was ample liquidity in the market from individual and institutional investors last year. So, when the IPO lock-in periods expired and select investors came to the market to sell, there was likely enough demand for the same as there was minimal impact on the share prices,” said Pranav Haldea, Managing Director, PRIME Database. “This may not hold true any longer as lower liquidity and overall bearish sentiment may result in some price correction if the investors decide to exit.”
To be clear, a sizeable portion of the shares held by promoters and the promoter group may not be up for sale.
Open market exits
Open market sales were the largest exit type last year for PE/VC investors as equity prices and trading multiples were at an all-time high, said Soni. Such sales include PE funds invested in a publicly listed company selling their stake or PE/VC investors in an IPO booking further exits after their lock-in period ends.
“We expect to see a significant correction in this exit type till the buoyancy in trading multiples returns,” Soni said.
Open market exits surged after the pandemic, reaching a record high of $12.9 billion last year, according to EY analysis of VCCEdge data. Broader investor base, enhanced liquidity, ability to sell large blocks without material price disruption and greater transparency make this exit strategy more attractive for PE/VC investors.
The lock-in period differs for different investors.
Fifty per cent of the shares allotted to anchor investors must be locked-in for 90 days, and the rest must be locked in for 30 days from the date of allotment.
For promoters, 20 per cent of the post-issue paid-up capital must be locked in for 18 months. An allotment exceeding 20 per cent cannot be sold for six months. For non-promoters, the lock-in ends after six months.
