Foreign investors play a crucial role in the success of upcoming tech IPOs in India, as domestic funds remain cautious about backing lossmaking young ventures. In the first half of the year, foreign portfolio investors significantly increased their holdings in three start-ups – Zomato, Delhivery, and Paytm. Foreign investors now hold 33.3% of Zomato, 22.7% of Delhivery, and 16.8% of Paytm. Their share of Policybazaar, an insurance start-up, doubled to nearly 30%. However, domestic institutions owned much smaller percentages of these companies.
This divergence highlights foreign investors’ familiarity with highly valued yet lossmaking public companies, particularly in the US, and domestic investors’ reservations about such ventures. Foreign investors are excited about the growing prospects of the Indian economy and view these companies as promising in the long term. They are more accustomed to seeing such businesses abroad than domestic investors.
Foreign inflow will be crucial for some of the upcoming IPOs, especially the larger flotations like Oyo, Firstcry, and Swiggy. IPOs in India reached a peak in 2021, with 63 companies listed on the main stock exchanges and raising Rs1.18tn.
Foreign investors’ appetite for lossmaking or slightly profitable start-ups is influenced by the cost of capital and return expectations. Fund managers who raise money from Indian investors have higher return expectations compared to those who raise money from western markets. Foreign investors have lower return expectations because returns in their home market have been even lower, at least until recent rate hikes.
Foreign institutions have increased investments in India as they seek lucrative returns in emerging markets. Investment in Indian equities from foreign investors between January and August stood at Rs1.35tn. In the previous year, they were net sellers.
The revival of IPOs is crucial for Indian start-ups and venture capital firms. India has attracted billions of dollars of private capital in the past decade, but a lack of profitable exits has raised concerns about the market’s ability to generate meaningful returns. VC exits in India from 2015 to 2020 amounted to $19.3bn, and in 2021, VCs sold shares worth about $9.5bn.
However, returns shrank to less than $4bn in 2022, with around 47% coming from secondary share sales. To continue attracting funds and building future start-ups in India, the market needs to demonstrate better returns.
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