Foreign Portfolio Investors (FPIs) have been observed employing a strategic approach where they sell their holdings in the secondary stock market and reinvest the proceeds through the Initial Public Offering (IPO) route. This strategy is particularly relevant in emerging markets like India, where IPOs often present lucrative opportunities.
Rationale Behind the Strategy:
Valuation Dynamics: FPIs often sell in the secondary market when they perceive overvaluation or foresee a market correction. By offloading shares, they lock in profits and reduce exposure to potential downside risks. On the other hand, IPOs, especially in growth-oriented sectors, can offer more attractive entry points with the potential for significant upside as the companies are often valued more conservatively.
Source:- news 18
Portfolio Rebalancing: The sell-and-reinvest strategy allows FPIs to rebalance their portfolios. Selling stocks that have reached or exceeded their target valuations allows them to free up capital. This capital can then be deployed in new or emerging companies through IPOs, which diversifies their holdings and can improve the risk-return profile of their portfolio.
Source:- news 18
Capitalizing on IPO Discounts: Companies going public often offer shares at a discount to attract investors. FPIs, with their significant capital base, can take advantage of these discounts, potentially earning high returns once the stocks list on the exchange.
Sectoral Rotation: The strategy also facilitates sectoral rotation. By selling stocks in overrepresented or underperforming sectors, FPIs can reallocate funds to IPOs in sectors with higher growth prospects or underweight sectors in their portfolio.
Implications:
Market Impact: Large-scale selling by FPIs can create downward pressure on the stock market. However, their participation in IPOs can provide crucial support to new listings, often leading to successful IPOs and buoyant post-listing performance.
Long-Term Growth: This approach supports the long-term growth of emerging markets by channeling funds into new and innovative companies, thereby fostering economic development.
Overall, the FPI strategy of selling in the secondary market and buying through IPOs reflects a sophisticated approach to managing risk, optimizing returns, and contributing to market dynamism.
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