Why in news?

Chief Economic Advisor (CEA) V. Anantha Nageswaran has raised red flags about the changing nature of India’s initial public offerings (IPO) market. He warned that IPOs are increasingly being used as exit routes for early-stage investors rather than for raising long-term productive capital.

His remarks come at a time when India’s primary market is witnessing a surge in IPO approvals and record fundraising plans, prompting concerns over overpricing and retail investors entering at inflated valuations.

What’s in Today’s Article?

• IPOs Tilt Toward Promoter Payouts Instead of Capital Raising
• OFS Dominates Recent IPO Structures
• Overpricing Becomes a Red Flag
• Promoter Exits: Sign of a Maturing Market
• Retail Investors at Risk in an Overheated IPO Market
• IPO Market at a Turning Point

IPOs Tilt Toward Promoter Payouts Instead of Capital Raising

• Recent IPO data shows a worrying shift: instead of raising fresh capital for business expansion, most new listings are being dominated by offers for sale (OFS) — allowing promoters and early investors to cash out.
  • OFS is a mechanism on the stock exchange that allows existing shareholders, such as promoters or large institutional investors, to sell their existing shares to the public. 
• Between SEBI-approved and pending applications, over 200+ companies are seeking to raise nearly ₹2.8 lakh crore, yet the structure of recent IPOs reveals that:
  • LG’s entire ₹11,000 crore IPO went to the Korean promoter.
  • Tata Capital’s IPO: Over ₹8,600 crore went to promoter Tata Sons and early investors.
  • Lenskart: More than ₹5,000 crore was cashed out by founders and pre-IPO shareholders.
  • WeWork India: The full ₹3,000 crore issue was an OFS by existing stakeholders.
• In short, the majority of recent IPOs have become monetisation events rather than instruments for raising long-term growth capital.

OFS Dominates Recent IPO Structures

• A major share of recent IPO issue sizes comprises Offer for Sale (OFS), where existing shareholders — mainly promoters and pre-IPO investors — sell their stakes.
• OFS proceeds do not benefit the company, as the money goes directly to the selling shareholders.
• OFS is not inherently problematic, but when it overshadows fresh issue components and valuations appear inflated, it raises serious concerns.

Overpricing Becomes a Red Flag

• Market experts warn that overpriced IPOs are becoming a new systemic risk.
• They note that hype-driven valuations, heavy anchor investor activity, and unrealistic growth assumptions are creating a dangerous disconnect between market prices and actual earnings potential — leaving retail investors exposed.
• Companies - with modest profits, short operating history, or uncertain future cash flows - are demanding valuations that exceed even those of well-established, profitable listed firms.
• These valuations are often justified using optimistic projections and aggressive accounting to project stronger growth ahead of listing.

Promoters and PE Funds Cashing Out at High Valuations

• Promoters and private equity investors — who understand the company’s real financial health — often acquired shares at very low valuations earlier.
• The IPO gives them a chance to exit at peak valuations, transferring nearly all the risk to public investors.
• The biggest concern associated with this the is information asymmetry:
  • Promoters and early investors know far more about the company’s weaknesses and risks.
  • When they sell aggressively at high valuations, it raises the question: if the future is so bright, why are insiders exiting now?
• This makes public investors wonder whether:
  • the company really needed fresh capital, or
  • the IPO was simply an opportunity to encash a favourable market sentiment.

Promoter Exits: Sign of a Maturing Market

• Some experts argue that high promoter and private equity exits through IPOs reflect market maturity rather than malfunction.
• They note that many IPOs criticised for high valuations have later become multibaggers, including several new-age tech companies that have delivered ~50% average returns since listing.
• They emphasised that early investors take significant risk in backing young companies.
• They deserve viable exit routes to recycle capital into new ventures—exactly how mature Western markets operate.
• Many IPOs do very well, but investors forget that early funds also invest in many companies that fail. So, they need exits to recover money and keep investing.

Retail Investors at Risk in an Overheated IPO Market

• Retail investors often rush into IPOs believing they guarantee quick profits.
• While some stocks list with a big pop, many fall or stagnate once excitement fades and prices adjust to real fundamentals.
• As a result, small investors end up holding overpriced shares while promoters and early investors walk away with huge gains.
• Not All IPOs Are Bad — But Caution Is Needed
  • Several good companies have used IPOs responsibly. However, the current trend of inflated valuations, heavy offers for sale (OFS), and aggressive marketing has made the IPO space riskier than before.
  • Experts say transparency on pricing, profitability, and peer comparisons is essential to protect retail investors.
• Why Retail Investors Are Vulnerable?
  • Even though regulators have tightened disclosure norms, pricing remains market-driven.
  • When liquidity is high and sentiment is bullish, promoters and investment bankers naturally push valuations beyond fundamentals, leaving small investors exposed.

IPO Market at a Turning Point

• If IPOs continue to be used mainly as exit avenues rather than genuine fundraising routes:
  • public trust will decline
  • retail participation will shrink
  • and the market may face a sharp correction
• For a healthy ecosystem, companies must price more realistically, investors must look beyond narratives, and regulators must strengthen oversight.
• The bottom line: too many IPOs channel money to promoters instead of funding new projects or capacity expansion.