The issue has been subscribed close to five times in the first two days, with retail and foreign institutional investors driving the bids. The issue is likely to see a bigger response, as HNIs usually put in bids on the final day, market participants said.
Analysts say the stock may have a lot more to offer to investors in the coming months than just the listing pop.
Given the large size of the Zomato offering as well as its market capitalisation of nearly Rs 65,000 crore, the stock may become eligible for an immediate entry into the indices maintained by index aggregator MSCI. These indices are tracked most by global mutual funds and global passive funds.
“Large IPOs of non-index constituents are not subject to a minimum length of trading requirement and may be included in a market investable equity universe and standard index outside of a quarterly or semi-annual index review,” MSCI said in its latest methodology report released in May.
If Zomato meets MSCI’s large IPO criteria, the index aggregator may make an announcement for the inclusion of the stock after the third day of trading and the same may take effect after the 10th day of listing. However, since MSCI’s quarterly review is due on August 11, the index aggregator may also consider a potential inclusion during that review.
However, in order to be eligible for such an inclusion, Zomato’s stock will have to fulfill certain other criteria.
Minimum Size
Assuming Zomato gets a large IPO tag from MSCI, it will not be required to meet the criteria for minimum trading of at least three months before a quarterly review. The other criteria is for a global minimum size range. As per MSCI, that range for a stock in emerging markets is $2.34 billion to $5.39 billion, and Zomato’s near $9 billion market capitalization can meet that easily.
Free-float limit
In order to be eligible, a stock must have a free-float market capitalization of 50 per cent of global minimum size requirement. Assuming the upper bound of the global minimum size range of $5.39 billion for EM stocks considered in May, Zomato’s free-float market value will need to be higher than $2.7 billion. Since there is no promoter ownership in Zomato, the company’s free-float market capitalization will exceed the MSCI requirement.
Liquidity requirement
This criteria is the trickiest of for the stock. Usually, MSCI demands a minimum liquidity level of 15 per cent of three-month average traded value ratio (ATVR) and 80 per cent of three-month trading frequency over the past four consecutive quarters, as well as 15 per cent of 12-month ATVR. In the case of Zomato, MSCI may consider the prevalent trading data to determine eligibility.
Minimum foreign inclusion factor
MSCI mandates that in order for a stock to be eligible, it must have a foreign inclusion factor of 0.15 or above. The measure provides an idea of how much of the outstanding shares of the company are available for foreign ownership. Since Zomato’s FPI investment limit is 100 per cent, it will score higher on this count.
Minimum foreign room
MSCI requires that at least 15 per cent of the share available in the market be eligible for purchase by FIIs. As with the above criteria, Zomato’s 100 per cent FPI limit and high foreign shareholding post IPO should help the stock meet the criteria.
If Zomato’s stock manages to meet all the above criteria and is considered by MSCI for immediate inclusion as a large-sized IPO, it could draw millions of dollars in inflows from passive funds in the coming months.
If MSCI does not consider Zomato as a large or significant IPO, the stock of the online food aggregator could still be eligible for inclusion at the index aggregator’s semi-annual review on November 11. Either way, the bonanza in Zomato’s stock may not just stop with its listing.
