Inside India’s IPO frenzy: mostly promoter exits, not capital-raising opportunity | Explained News

Behind the glitter of listing-day and oversubscription headlines lie a deeper query that worries severe traders: are IPOs turning into systematically overpriced? And, are promoters and early traders utilizing IPOs as an exit path to money out their holdings whereas the general public enters these shares at inflated costs?

A better have a look at latest IPO developments suggests the reply might be tilting more and more in direction of a “yes”. That’s at a time when 84 firms have acquired the inexperienced sign from the Securities and Exchange Board of India (Sebi) to boost Rs 1.07 lakh crore and one other 118 crore firms have approached it for approval to boost Rs 1.76 lakh crore, in response to information from primedatabase.com.

An IPO is often alleged to be a mechanism for firms to boost contemporary capital for enlargement, innovation and long-term development. Most Indian IPOs during the last three months have been structured as provides on the market, primarily designed much less as fundraising automobiles for future investments and extra as monetisation alternatives for promoters and pre-IPO traders — personal fairness funds, early angels, strategic traders and generally even founders.

For instance, Korean agency LG’s whole IPO of Rs 11,000 crore went to the Korean promoter. In the case of the Tata Capital IPO, over Rs 8,600 crore went to the promoter Tata Sons and different traders, and within the Lenskart IPO, over Rs 5,000 crore was a suggestion on the market by promoters and different early shareholders. The whole Rs 3,000 crore concern of WeWork India was OFS by present shareholders.

Dominating share of OFS

The construction of many points tells the story. A big portion of the difficulty measurement in a number of IPOs has lately consisted of Offer for Sale (OFS), a transaction wherein present shareholders promote their shares to the general public. OFS proceeds do not go to the corporate. They go straight into the pockets of these promoting shares – promoters and different pre-IPO shareholders. This is not problematic or rip-off by itself as early traders deserve respectable exits. But when OFS dominates the difficulty and valuations look stretched, it raises severe pink flags.

According to Ponmudi R, CEO, Enrich Money, overpriced IPOs are rising as a brand new warning sign in India’s main market. “The growing rush to chase lofty valuations — often driven by hype, aggressive anchor participation, and overly optimistic growth assumptions — is blurring the line between confidence and complacency. When market prices drift too far from earnings reality, it’s retail investors who bear the brunt, undermining the very trust and participation that sustain the market’s long-term vitality,” Ponmudi mentioned.

Companies with restricted profitability, modest observe data or unsure future money flows have been demanding valuations that even established, well-managed listed firms do not command. This “valuation leap” is commonly justified by means of shiny pitch decks, future projections and narratives of disruption. In many instances, the businesses undertake aggressive accounting approaches to color an image of accelerated development and increasing margins proper earlier than going public.

The promoters and early shareholders, who acquired shares years earlier at vastly decrease valuations, get a golden opportunity. “The biggest worry that I have at this point of time — the investor is taking all the risk. Who is the seller? The seller is private equity. Private equity knows everything about the company. They know whether that stock is overvalued at 40 times or 50 times. The promoter is selling. The promoter knows whether the stock is overvalued or undervalued,” a prime fund supervisor mentioned on the sidelines of the Morningstar investor convention lately.

Analysts mentioned the most important concern is asymmetry of data and incentives. Promoters and personal fairness funds know way more in regards to the firm’s inside weaknesses, dangers and life like development potential than the general public markets ever will. When they select to promote a big portion of shares within the IPO, particularly at excessive valuations, it raises a basic query: If the long run’s so shiny, why are these closest to the corporate cashing out aggressively? Investors even start to surprise if the IPO proceeds have been actually wanted, or if the objective was merely to reap the benefits of scorching market sentiment.

Sign of maturing markets?

However, some specialists imagine that promoters and personal fairness funds utilizing IPOs to exit is definitely an indication of a maturing market.

According to Pranav Haldea, MD, Prime Database, there have been a number of situations up to now whereby a giant hue and cry was made about costly valuations on the time of IPO. Several of those have gone to develop into multibaggers. “Even the much-maligned new age technology companies have, on an average, delivered an approximate return of 50 per cent since their listing. Somehow, we have this unfair expectation of all IPOs to not just list with a pop but to also continue to trade in the positive until perpetuity,” he mentioned.

“We need to recognise that initial investors have taken significant risks by investing their money. They will need an exit, return money to their investors, and only then will they be able to raise the next round of funding to invest in the next set of companies,” Haldea mentioned. “This is akin to what you see in the western markets and is a sign of maturing of the Indian capital market ecosystem. We should not grudge them for making money. For every multibagger, it is also important to remember that there would be 10 duds where they would have invested,” Haldea mentioned.

Retail traders pour in

That mentioned, retail traders typically fall sufferer to this surroundings of IPO hype. They are inclined to view IPOs as assured alternatives for fast positive factors, however when the euphoria subsides, valuations recalibrate and the inventory begins buying and selling on fundamentals. Several high-profile IPOs in recent times have delivered destructive or stagnant returns after the primary few months, regardless of blockbuster listings. The public finally ends up holding costly shares, whereas insiders stroll away with huge income.

This does not imply each IPO is overpriced or unfair. Many high-quality firms have used the general public markets responsibly. But the pattern of extreme valuations, heavy OFS parts and aggressive advertising methods has develop into frequent sufficient to warrant warning.

Ponmudi mentioned India’s development story stays strong, however valuation self-discipline should evolve alongside it. Greater transparency round ahead P/E multiples, peer benchmarks, and profitability outlooks is crucial to make sure knowledgeable investing. “The market must prioritize sustainable business models over speculative pricing — because if short-term greed takes precedence, It risks eroding the long-term growth cycle that India’s markets have painstakingly built on credibility and investor trust,” he mentioned.

Regulators have tried tightening disclosure norms, particularly round related-party transactions, monetary projections and utilisation of funds. But pricing stays largely a market-driven mechanism. When liquidity is ample and retail enthusiasm excessive, funding bankers and promoters naturally push for the best doable valuations. This imbalance of energy leaves small traders disproportionately susceptible.

The IPO market is at a crossroads. “If companies treat IPOs primarily as exit routes rather than long-term partnerships with public shareholders, trust will erode. If retail investors repeatedly face post-listing disappointments, participation will shrink. And if valuations continue to stretch beyond fundamentals, the market risks a painful correction,” mentioned a fund supervisor.

For the IPO ecosystem to stay wholesome, firms should value points extra fairly, traders should consider fundamentals fairly than narratives, and regulators should proceed tightening oversight of disclosures. Until then, one factor is evident: in too many Indian IPOs immediately, promoters mint cash whereas the general public is left holding overpriced shares. The backside line: the cash doesn’t go into capability enlargement or new tasks.