The Zomato stock plunged on Monday as investors scrambled to sell the shares of the food delivery start-up after the one-year freeze on all its pre-IPO (initial public offering) shareholding ended. The stock closed at a new low of Rs 47.55, down 11.4 per cent over its previous close. This was the second-worst single-day sell-off since its listing.
Typically, selling pressure is seen whenever the lock-in period meant for IPO anchor investors ends. However, it’s unusual for shares of companies to tank after the end of the one-year lock-in period.
Market players attributed the selling pressure to Zomato’s atypical shareholding pattern. The company — the first major start-up to list — has no promoter shareholding. Most of its shares are in the hands of private equity and venture capital funds, employees, and founders (who are not classified as promoters).
Nearly Rs 1,300 crore worth of shares changed hands in the counter — six times more than its six-month average. However, the names of shareholders who sold on Monday couldn’t be ascertained. Shares of Zomato are down 37 per cent over its IPO price of Rs 76, and 72 per cent below its lifetime high of Rs 169.
“The one-year pre-IPO lock-in applies to all companies. It is to ensure some skin in the game. Promoters and founders don’t normally sell after one year of IPO. In case of companies with no promoter, as the shareholder base is diverse, there could be more selling pressure at the expiry of lock-in just like post expiry of anchor lock-in. Also, lately due to volatile markets, investor confidence has been weak, which could be one of the reasons for sell-off whenever such share freeze is ending,” said Sudhir Bassi, executive director at Khaitan & Co, a law firm.
The National Stock Exchange (NSE) in a circular on Friday had notified investors about the end of lock-in on Zomato shares.
Industry players said the trading pattern in Zomato shares could set an example for other start-ups where the one-year lock-in is set to end later this year. Other start-ups such as Policy Bazaar, Nykaa and Paytm had listed within months of the Zomato IPO. Just like Zomato, Policy Bazaar and Paytm have no ‘promoters’ and have diverse shareholding. Although Nykaa has 52.4 per cent promoter holding, PE funds and wealthy investors have substantial holding in it.
“Lock-in of securities held by pre-IPO shareholders serves an important purpose of protecting the share value upon listing, from spikey movements, acting as a cushion for the benefit of IPO subscribers and other shareholders. At the expiry of the lock-in, investors can take a considered call, basis past performance, global economic factors and future outlook. Presently, the share markets globally are volatile and with investors treading cautiously, some sell off at the expiry of the lock in period is natural,” said Saurabh Tiwari, partner, DSK Legal.
Given the current environment where start-up shares have plunged from their record levels, the end of pre-IPO lock-in is proving to be another source of turbulence.