Initial Public Offerings: The Beginning of Scale or the End of the Road?

Why is this company going public now? Is this IPO about scaling the business, or is it about timing the exit? Does the promoter see something the market does not?

A Moneycontrol report states that total IPO fundraising in 2025 stood at a whopping Rs 1.76 lakh crore. Of the 103 IPOs, offer-for-sale (OFS) transactions accounted for Rs 1.11 lakh crore, while fresh issues contributed only Rs 64,406 crore. Of the OFS component, promoters offloaded shares worth Rs 79,000 crore, while private equity investors sold shares worth Rs 20,644 crore. The remainder was offloaded by banks, domestic companies, and individual shareholders. The pattern is clear: for many promoters, the IPO has become the exit, not the beginning.

If you bought shares in any of these companies, believing the promoter would stay and build the business, you were making an assumption the prospectus never explicitly confirmed. That information asymmetry is what this article aims to address.

The Pre-VC Era:

In the 1990s and early 2000s, going public was a rite of passage for companies that had already proven themselves. The IPO was a badge of honour – a signal that the company was ready to take public accountability. Promoters continued to hold on to their stakes and most IPOs were fresh issues to raise additional capital for expansion.

Infosys listed in 1993 after 12 years of operations. Narayana Murthy and his co-founders did not treat the IPO as an easy exit. In fact, the IT industry was going through turbulent times in 1993 (we have discussed the trajectory of Indian IT industry in our March edition) and the Infosys IPO was a challenging one. Murthy and his co-founders stayed for another two decades in the company. Wipro and Eicher Motors are other examples of promoters who saw the IPO as a way to scale, not a chance to exit.

SEBI’s Venture Capital guidelines in 1996 allowed venture capital companies to invest in listed companies. Global giants like Sequoia Capital, Accel, Matrix Partners set up India focused funds. Suddenly, founders didn't need friends and family loans to start businesses—viable ideas could attract institutional capital.

VCs gave promoters easy access to immense capital but it came with a price: an exit deadline. Venture capital operates on fund lifecycles—typically 8-10 years from first investment to exit. The promoter's vision, which might span decades, now had to also factor in the investor's exit timeline.

As more businesses began structuring their operations around this timeline, the nature of entrepreneurship changed. Some promoters began viewing the VC’s exit lines as their own. For some founders, this timeline pressure created incentives to optimize financials for fundraising rather than accuracy. This shift—from IPO as growth milestone to IPO as exit mechanism—created the need for stronger investor protections.

SEBI Safeguards:

SEBI responded with several safeguards designed to ensure transparency and prevent manipulation.

• Disclosure requirements: The Red Herring Prospectus contains information pertaining to last 3 years financials, risk factors, purpose of raising capital, pending litigation, related party transactions. It also provides the price band of the issue.

• Book building process: SEBI mandates this process to determine the price band in which the shares can be allotted during an IPO. This ensures prices of the shares are not fixed arbitrarily.

• Lock in periods: SEBI requires promoters to hold at least 20% of the post‑issue capital and lock it in for 18 months in most IPOs. The exit is delayed, not prevented.

• OFS Disclosure: Names of the shareholders who are selling their shares is to be listed along with the number of shares they are selling and their relationship with the company (Promoter/Institutional Investor).

  
  

SEBI's approval only confirms disclosure compliance—not whether the company is a good investment. These safeguards prevent outright fraud yet does not prevent retail investors from losing money on overvalued IPOs.

Why They're Not Enough:

In November 2021, Paytm IPO was launched at an issue price of Rs 2150. It listed at Rs 1950 (9% discount) and crashed to Rs 600 (72% fall) within 4 months of listing. IPO issue was for Rs 18,300 crore of which Rs 10,000 crore was OFS and only Rs 8,300 was fresh issue. Loss making business that was overvalued coupled with marketing hype of fintech in Covid era led to this inevitable crash. Major investors—SoftBank, Ant Group, and Alibaba—were reducing stakes through OFS, signalling that insiders were exiting at what they considered peak pricing.

Around the same time, a popular e-commerce website, Nykaa’s IPO was launched at an issue price of Rs1125. It listed at Rs 2018 (79% premium) and even touched Rs 2574 on listing day. IPO issue was for Rs 5352 crore of which Rs 4722 crore was OFS and only Rs 630 crore was fresh issue. Unlike Paytm, Nykaa was a profitable business in beauty and personal care – on paper, it looked strong yet its risk was undersold. After the lock-in period expired, institutional investors began reducing stakes. Combined with intensifying competition from Amazon, Flipkart, and new entrants like Tira (Reliance), the stock corrected significantly. As of 2026, it trades around ₹180—a steep decline from its listing day peak. 

Both these cases demonstrate how retail investor wealth was wiped out in the IPO. Paytm had accumulated significant losses with no disclosed path to profitability at the time of listing. Nykaa’s valuation multiples were astronomical – the listing premium of 79% pushed P/E ratios to levels that no fundamental analysis could justify. Yet retail investor bought into the hype.

Both cases demonstrate how retail investor wealth was destroyed despite full regulatory compliance.

The Gaps SEBI Can't Close:

OFS during IPO is legal. Promoters can sell shares as part of the IPO itself – they don’t even wait for listing. If the IPO is 60% OFS, 60% of proceeds go to selling shareholders, not the company. This is disclosed, but retail investors rarely focus on it.

Lock-in only delays exits. Promoters can exit after the lock in period, no separate disclosure is required. Investors have no clarity if the promoter will stay on or not.

Disclosure doesn't equal clarity. SEBI mandated disclosure regarding risk factors and financials are buried deep in the 300-page prospectus in legal terms. Retail investors either don’t read them or don’t understand them.

Regulations assume informed investors. SEBI assumes rational and informed investors whereas in reality, investors are influenced by hype and flashy ads. That gap—between regulatory assumption and investor behaviour—is where wealth gets destroyed.

Investor Checklist: Safeguarding your money

As a retail investor, read the prospectus carefully. Regulations require companies to disclose material information—but disclosure doesn't mean clarity. Critical details are often buried in legal language. Ask these questions before investing:

1.     Who is selling and why?

Fresh issues mean that capital raised will flow into the company and will reflect in the Balance Sheet. Offer for Sale means that money goes into the personal account of the promoters or VCs and will not appear in the company’s Balance Sheet.

If VCs are offloading their shares, is it because the tenure is over? If not, then why now? If both promoters and VCs are selling their stakes, that would be a huge red flag;

If promoters end up having only a small stake, you should question how strongly their interests remain aligned with long‑term value creation;

2.     Where is the money going?

For fresh issues, what is the end use of this money. Will this be used for a specific strategic purpose like capex for a new factory or R&D investment, or if an old debt is being settled, then what is the context? If the company is using vague terms like “general corporate expenses”, these terms often indicate that the money is not earmarked for specific use and can be mismanaged.

If the pitch is about “growth and innovation” but proceeds are mostly going to existing shareholders (OFS) or past debt obligations, there is a mismatch between the pitch and reality.

3.     What is the profitability of the company?

Is the company currently profitable? If no, then does it have a specific plan on when and how it will become profitable. Promises like “we will be profitable in the future” are vague, non-specific and a big red flag.

Check if there is a sudden spike in profits, revenue or any other significant accounting treatment leading to restatement of balance sheet in the immediate past. Some companies adopt aggressive accounting practices before IPO;

Frequent auditor changes in the last few years – another red flag item. Have auditors qualified their reports? If so, understand why.

4.     How Does Valuation Compare?

Compare the company’s price to its peers – does it fall with the range or is it in premium segment.

If it is premium, what are the reasons to justify this premium? Does the company have better margins or faster growth? Again, if the justification is based on vague terms like “future potential”, it is a red flag.

5.     Governance and Promoter Commitment

Do the promoters have any history of regulatory issues, governance failures?

Has the company appointed independent directors, constituted an audit committee?

Are related party transactions disclosed?

6.     Influence of FOMO in decision making

Do not get swayed by celebrity endorsements or marketing hype. A product’s performance is rarely reflected in its advertising;

If this were already listed at the IPO price, would you buy it? If no, IPO hype shouldn’t influence you;

If you are unsure, wait for listing day to see how the shares perform. Sometimes, waiting is better than losing money.

After this process, you should be able to answer: Why is this company going public now? Where is the money going? Who benefits most from this IPO? If you can't answer these clearly, you don't have enough information to invest.

This checklist may seem exhaustive, but its purpose isn't to discourage you from investing in IPOs. Good companies with strong fundamentals and committed promoters do go public—and reward patient investors. The goal is to give you the tools to separate the legitimate from the opportunistic. Not every IPO is an exit disguised as growth. But the ones that are leave clear signals if you know where to look.