The recent turbulence in stock markets and the ongoing volatility could have a significant impact on the plans of investors looking to sell shares of newly-listed companies once their lock-in period expires. These shares are primarily held by pre-IPO investors, including promoters, private equity firms, and anchor investors. A staggering $42 billion worth of shares from 90 companies will potentially become available for sale between February 18 and May 31, according to shareholder analysis by Nuvama Alternative & Quantitative Research.
### The Waiting Game
One such example is Swiggy, where the six-month lock-in period is set to end on May 13, freeing up 1,897 million shares for trading. Despite this, the share price has seen a decline of 7.6% from the IPO offer price of ₹390. Similarly, Bajaj Housing Finance will see the end of its one-year lock-in period for 5,291 million shares on April 15. The stock is currently trading 66% higher than its issue price of ₹70 but 38% lower than its 52-week high.
Vivek Soni, Partner and National Leader – Private Equity Services at EY India, highlighted the challenges investors may face in the current market scenario. Many PE-backed companies that went public a year ago are now trading well below their listing price. This unfavorable market condition may dissuade investors from selling off large stakes at significantly lower prices once the lock-in period expires. Data from PRIME Database reveals that nearly half of the companies that debuted since the beginning of last year are currently trading in the red, making a premature sale a risk incurring losses or settling for prices far below their peak.
### The Exit Strategy
Last year, open market sales emerged as the predominant exit route for PE/VC investors, driven by record-high equity prices and trading multiples. Soni pointed out that this exit type is likely to witness a considerable correction until trading multiples regain their strength. The surge in open market exits post-pandemic reached a peak of $12.9 billion last year, according to EY’s analysis of VCCEdge data. This strategy appeals to investors due to its broader investor base, increased liquidity, capacity to sell significant blocks without disrupting prices, and enhanced transparency.
The lock-in period varies across different investor categories. Anchor investors must retain 50% of their allotted shares for 90 days while the remaining shares are locked in for 30 days from the allotment date. For promoters, a minimum of 20% of the post-issue paid-up capital must be held for 18 months, and any allotment exceeding 20% cannot be sold for the initial six months. Non-promoters, on the other hand, are subject to a six-month lock-in period.
In conclusion, the uncertainties in the current market landscape pose challenges for investors aiming to exit their positions in newly-listed companies post the lock-in period. It remains to be seen how these investors navigate the volatile market conditions and decide on the optimal exit strategy to maximize returns while mitigating risks.
