Offer for sale in IPO: From Caveat Emptor to Caveat Venditor

Offer for sale is a mechanism for the promoters and initial investors to monetise their investment by selling their shares in the open market. This route can be used by the listed company and even by an unlisted company. The promoters or early investors of a listed company can go for OFS to sell their existing shares through the stock exchange, whereas the promoters or early investors of an unlisted company can go for OFS through an IPO. The mechanism operates across jurisdictions under varying terminology. In the United States, it is known as a secondary or secondary market offering, while in Europe it is commonly described as a secondary share sale or follow-on offering.

Unlike a fresh issue, OFS does not bring new funds into the company. There is no increase in share capital, no dilution of equity, and no change in book value per share. The proceeds flow entirely to the selling shareholders. So, when OFS overwhelms fresh capital raising, the IPO ceases to be a moment of corporate capital formation and becomes, instead, a monetisation event for the promoters and early investors.

OFS: Some recent trends
Over the past decade, nearly 66% of IPO proceeds in India have been through OFS. In the last two years, promoters and early investors of several well-known startups used the route of OFS to monetize their investments. For instance, in 2024, 13 startups raised ₹292 billion through IPOs, of which ₹145.70 billion was in the form of OFS. The pattern continued in 2025, reinforcing the sense that India’s IPO pipeline is increasingly being used to cash out rather than to build up

OFS: Some larger concerns
When the bulk of IPO proceeds accrue to selling shareholders, public investors are not funding growth, capacity or innovation. They are, in effect, buying someone else’s liquidity, often at valuations shaped by storytelling and accounting adjustments rather than by operating fundamentals. Such shifts made India’s Chief Economic Advisor V. Anantha Nageswaran to raise  his concerns. He said, "India's equity markets have grown impressively, but Initial Public Offerings (IPOs) have increasingly become exit vehicles for early investors, rather than mechanisms for raising long-term capital. This undermines the spirit of public markets."

In recent years, OFS transactions by foreign parents and overseas investors in a handful of well-known companies have enabled monetisation of Indian assets worth over ₹460 billion

While it is difficult to say whether the entire amount has been repatriated or not, these transactions represent a clear channel through which flight of capital can occur.

OFS: Caveat Emptor
None of the above is an argument against OFS per se. In fact, OFS is one of the important mechanisms for providing liquidity to the market. As SEBI’s whole-time member Kamlesh Varshney has  noted, "such exit routes are necessary for investors," and he warned that India will not be able to attract the required investments otherwise.  However, OFS becomes a matter of concern if the valuations are not based on the fundamentals, but on profit created through accounting adjustments. Unfortunately, several accounting adjustments have been observed in the IPO documents of some well-known Indian companies in the recent past.

Lenskart, one of India’s most visible consumer internet brands, structured around 70% of its IPO as OFS. Financial statements showed losses in earlier years, followed by a sudden profit in the IPO year, largely due to fair-value adjustments and investment income.

Pine Labs offers another revealing example. In the period leading up to the IPO, Pine Labs reported a swing from losses to profits. A closer examination revealed that much of this improvement is due to accounting adjustments, such as higher other incomes, depreciation and impairment changes, and significant deferred tax adjustments, rather than from a sustained improvement in operating cash flows.

PhysicsWallah also restated financials to reduce losses in FY25 compared to a much larger loss in FY24. The reduction in the loss was attributed to non-cash items and accounting adjustments such as classification of fair-value losses on financial instruments like compulsorily convertible preference shares.

It has been observed that companies often use some of the following accounting adjustments to increase profits or decrease losses just before the date of IPOs:

• Deferred tax
• One-time gains or expenses
• Unusual related-party transactions
• Aggressive revenue recognition policies
• Fair value changes on financial instruments
• Prior period or retrospective accounting policy changes

None of these practices are necessarily illegal. Accounting standards permit judgement. But judgement exercised consistently in one direction, just ahead of a public sale by insiders, should invite scrutiny. When valuations are built on such foundations, the risk is borne disproportionately by retail investors, who enter at peak optimism while insiders exit at peak pricing.  In such situations the principle of caveat emptor—let the buyer beware—has traditionally been invoked.

The investors are expected to analyze fundamentals of the company carefully, understand the past and examine the future thoroughly by going through both numbers and narratives. This principle is sound, but difficult to implement. Retail investors, even diligent ones, face structural disadvantages in time, expertise and access. A market that relies solely on buyer vigilance to correct seller behaviour is neither fair nor efficient.

OFS: From Caveat Emptor to Caveat Venditor
To ensure a fair and transparent securities market, it is essential to balance the responsibility between the investors and the sellers. It is time to put into practice the principle of caveat venditor -let the seller beware.

The principle demands accountability  while providing promoters and early investors a route to exit too. When promoters and early investors sell their shares to the public, particularly in companies with limited operating histories, they should bear a higher burden of disclosure, clarity, and restraint. The spirit of disclosure must matter as much as its technical compliance.

SEBI’s proposal to introduce a concise, standardised summary of IPO offer documents is a step in the direction of upholding the principle of caveat venditor. The summary sheet is intended to help retail investors better understand the IPO and protect them from being misled by the company or any intermediary. It is not enough to ask the companies to provide the data. They must be held accountable for not providing accurate, complete, and timely disclosures. Regulators and exchanges must also be empowered to challenge aggressive accounting narratives, demand sharper explanations for material adjustments, and enforce consequences where disclosures mislead by omission or obfuscation.

Going forward
OFS is a legitimate mechanism in the capital market, to ensure liquidity and provide promoters and early investors an opportunity to monetize their investments. However, both buyers and sellers are expected to adhere to the principles of caveat emptor and caveat venditor. Caveat emptor fosters the spirit of self-regulation, and the practice of caveat venditor will not only protect investors but also enhance trust and credibility in the market by fixing responsibility on the sellers.

I would like to conclude with a few lines from Khalil Gibran’s famous poem The Prophet (1923), which aptly captures the essence of fair exchange:

“Yet unless the exchange be in love and kindly justice,
it will but lead some to greed and others to hunger.”