India's booming primary market is facing serious questions about its fundamental purpose as Chief Economic Advisor V Anantha Nageswaran raised concerns that initial public offerings are increasingly serving as exit routes for early-stage investors rather than instruments for raising long-term capital.
The Growing Trend of Offer for Sale Dominance
Fueled by abundant liquidity and aggressive retail participation, the Indian IPO market has witnessed unprecedented activity over the past two years. However, beneath the glitter of oversubscription headlines and blockbuster listings lies a troubling pattern: most Indian IPOs in recent months have been structured predominantly as offers for sale (OFS).
According to data from primedatabase.com, 84 companies have received SEBI approval to raise ₹1.07 lakh crore, while another 118 companies have approached the regulator for approval to raise an additional ₹1.76 lakh crore. This massive pipeline comes at a time when the very purpose of IPOs is being questioned.
An IPO is traditionally meant to be a mechanism for companies to raise fresh capital for expansion, innovation, and long-term growth. However, the current trend shows that OFS components, where existing shareholders sell their stakes to the public, are dominating issue sizes. The proceeds from OFS do not go to the company but directly into the pockets of selling shareholders - promoters, private equity funds, and early investors.
Alarming Examples of Promoter Exits
Several high-profile IPOs illustrate this worrying trend. In the case of Korean firm LG's IPO, the entire ₹11,000 crore offering went to the Korean promoter. Similarly, the Tata Capital IPO saw over ₹8,600 crore going to promoter Tata Sons and other investors. The Lenskart IPO featured over ₹5,000 crore as an offer for sale by promoters and early shareholders, while the entire ₹3,000 crore WeWork India issue consisted of OFS by existing shareholders.
Ponmudi R, CEO of Enrich Money, identifies overpriced IPOs as a new warning signal in India's primary 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.
Companies with limited profitability, modest track records, or uncertain future cash flows have been demanding valuations that even established, well-managed listed companies don't command. This valuation leap is frequently justified through glossy pitch decks and narratives of disruption, while many companies adopt aggressive accounting approaches to paint a picture of accelerated growth right before going public.
Information Asymmetry and Retail Investor Risks
The fundamental concern revolves around information asymmetry and misaligned incentives. As one top fund manager noted at the recent Morningstar investor conference, private equity firms and promoters possess complete knowledge about whether stocks are overvalued at 40 or 50 times earnings, while retail investors bear all the risk.
When promoters and private equity funds choose to sell substantial portions of their holdings in IPOs, especially at high valuations, it raises a critical question: if the company's future prospects are genuinely bright, why are those closest to the business cashing out aggressively?
This environment of IPO hype particularly affects retail investors, who often view public offerings as guaranteed opportunities for quick gains. However, when the initial euphoria subsides, valuations recalibrate based on fundamentals, leaving the public holding expensive shares while insiders walk away with massive profits.
Counter Perspective: Sign of Maturing Markets?
Some market experts offer a different perspective on this trend. Pranav Haldea, Managing Director of Prime Database, argues that promoters and private equity funds using IPOs for exits actually signifies a maturing market ecosystem. He points out that initial investors take significant risks by investing their capital and require exits to return money to their investors and raise subsequent funding rounds.
Haldea emphasizes that several companies criticized for expensive valuations during their IPOs have subsequently become multibaggers. Even the much-discussed new-age technology companies have delivered average returns of approximately 50% since listing. This pattern mirrors what occurs in Western markets and represents the natural evolution of India's capital market ecosystem.
However, the contrasting views highlight the delicate balance required in India's IPO market. While early investors deserve reasonable exits, excessive valuations and dominant OFS components raise legitimate concerns about market sustainability and retail investor protection.
Regulatory Challenges and Market Future
Regulators have attempted to address these concerns by tightening disclosure norms, particularly around related-party transactions, financial projections, and fund utilization. However, pricing remains largely market-driven, and when liquidity is abundant with high retail enthusiasm, investment bankers and promoters naturally push for maximum valuations.
This power imbalance leaves small investors disproportionately vulnerable. As Ponmudi emphasizes, India's growth story remains robust, but valuation discipline must evolve alongside it. Greater transparency around forward P/E multiples, peer benchmarks, and profitability outlooks is essential for informed investing decisions.
The IPO market stands at a critical crossroads. If companies continue treating public offerings primarily as exit routes rather than long-term partnerships with public shareholders, market trust will inevitably erode. Repeated post-listing disappointments could shrink retail participation, while persistently stretched valuations risk triggering a painful market correction.
For India's IPO ecosystem to maintain its health, companies must price issues more reasonably, investors must evaluate fundamentals over narratives, and regulators must continue strengthening disclosure oversight. Until these changes materialize, the current pattern of promoters minting money while the public holds overpriced shares threatens to undermine the market's long-term vitality.
