Understanding the IPO debate beyond headlines

The recent discussion triggered by a viral video featuring Sanjeev Prasad, Co-Head – Institutional Equities at Kotak Institutional Equities, has reignited scrutiny of India’s IPO markets. Prasad highlighted that over the past five years, roughly 40% of IPO proceeds have gone to promoters and early investors, while only around 15% has been deployed toward capital expenditure—suggesting limited contribution to real economic asset creation. His statement resonated widely, reflecting growing investor unease over whether public equity markets are increasingly serving as exit avenues rather than engines of new growth.

While the concern is valid and deserves examination, the broader picture is more nuanced than a headline statistic reveals.

The Concern: Is the IPO market becoming exit driven?

The disproportionate share of Offer for Sale (OFS) raises legitimate questions:

·         Are IPOs being priced and marketed primarily to facilitate stakeholder exits?

·         Are retail and long-term investors bearing valuation risks while insiders cash out?

·         Does the low share of capex funding indicate weak real investment demand or excessive optimism?

Examples of post-listing corrections in some high-profile IPOs reinforce the perception that public markets may at times be absorbing expensive liquidity events, not necessarily funding productive expansion.

These are structural questions worth debate—not merely sensationalism.

Understanding Primary Market Activity

Why IPO Activity Matters

The number and size of IPOs indicate important structural shifts and themes, including:

·         Formalization of the economy

·         Promoters opting for greater transparency, accountability, and governance discipline in exchange for growth capital

·         Expansion of the ecosystem of capital markets—bankers, brokers, exchanges, depositories, and intermediaries

IPO vs OFS – A historical perspective

The dominance of Offer for Sale (OFS) is not new. Over the past two decades, OFS has consistently exceeded IPO-based fresh issuance—comprising 75–85% of capital raised between 2017–2020.

Several economic and regulatory drivers explain this trend:

·         Government disinvestment in PSEs for fiscal correction and accountability (e.g., LIC’s ₹20,557 crore OFS—second-largest in recent years)

·         Mandatory minimum public shareholding requirements

·         Corporate deleveraging during the NPA cycle and post-Covid environment

·         Private equity and venture capital exits in high-growth sectors—ecommerce, healthcare, fintech, hospitality (e.g., PayTM, Zomato, Lenskart, Swiggy, Star Health, Nykaa)

·         Foreign multinationals monetizing mature India operations, enabling capital repatriation (Hyundai, LG, etc.)

·         Global consolidation moves post-GFC leading to India portfolio exits via OFS or M&A

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Purpose of fund raising – More nuanced than headline numbers

The observation that only 15% of capital raised went into capex is incomplete without considering industry composition and balance sheet conditions.

Key realities:

·         Persistent high real interest rates and banks’ post-NPA caution made equity cheaper than debt

·         20 of the 25 largest IPOs in the last five years came from asset-light services and technology businesses, where investment is largely in:

Ø  Customer acquisition

Ø  Intellectual property and software

Ø  Talent and brand development

Ø  Scaling up the operations

Hence, expecting deployment into plant and machinery is outdated thinking.

A shift in ownership mindset

Indian entrepreneurship has evolved. Unlike earlier business families who believed in perpetual ownership, today’s founders are open to value-based exits. Many businesses operate in:

·         Low-entry-barrier markets without regulatory protection

·         Rapidly evolving technology spaces with high disruption risk

In such sectors, early dilution or exit is rational risk management, not opportunism.

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​Conclusion

It would be wrong to say that OFS-linked liquidity is inherently harmful. To the contrary, it signals maturation of risk capital markets and improves:

·         Ownership broad-basing

·         Market transparency

·         Capital recycling for new innovation cycles

The shift in entrepreneurial mindset—from legacy ownership to agile value monetization—is consistent with global Silicon Valley-style models, not a structural flaw.

The concern about market froth and investor protection is legitimate. An IPO boom that disproportionately benefits exiting shareholders risks eroding confidence.

The context that capital formation today looks different from earlier manufacturing-centric cycles is equally valid.

The critical question for investors is not whether OFS is good or bad, but Does each IPO create enduring shareholder value, regardless of where the proceeds flow?

Sustained market health will depend on (i) Transparent pricing and governance; (ii) Improved disclosure on use of proceeds and return outcomes; (iii) Balanced participation of institutional and retail investors and (iv) Regulatory safeguards against excesses.

The real takeaway

The IPO market is neither a reckless exit carnival nor a flawless growth engine. It is evolving. The responsibility lies with investors to look beyond noise, viral clips, and simplistic narratives—and assess businesses on fundamentals, sustainability, and alignment of interest between promoters and new shareholders.

Informed analysis, not amplified soundbites, should drive investment decisions.