Why India’s IPO Boom is Raising More Questions Than Capital

India’s IPO market is often celebrated as a sign of economic vitality: rising retail participation, large fundraising numbers, and a steady pipeline of listings. Yet beneath this apparent success lies a more uncomfortable reality. The primary market is increasingly geared not towards capital formation, but towards monetising optimism, often at the expense of valuation discipline and long-term investor confidence.

The immediate trigger for this reassessment is the recent partial sell-down by the promoter of Ola Electric, not because the transaction was improper, but because it was revealing. Executed within months of listing and fully compliant with disclosure norms, it nonetheless underscored a recurring feature of India’s IPO cycle: public markets are often accessed at precisely the moment when insiders perceive risk–reward to be skewing unfavourably for themselves. The episode did not create the problem; it merely illuminated it.

This pattern is visible across recent listings. A defining feature of India’s IPO boom has been the dominance of Offer for Sale components. In several high-profile issues, fresh capital raised for business expansion has been secondary to providing exits for promoters and early investors. Paytm’s IPO, among the largest in India’s history, primarily enabled liquidity for pre-IPO shareholders. LIC’s listing, unprecedented in scale, was almost entirely an OFS exercise. In such cases, public markets functioned less as providers of long-term risk capital and more as exit platforms. Nothing wrong except the IPO price

The LIC episode also revealed a subtler problem: sheer balance-sheet opacity. Even seasoned analysts struggled to interpret LIC’s financials, shaped by legacy actuarial assumptions, sovereign linkages, policyholder liabilities and embedded guarantees that do not map neatly onto standard corporate accounting. Considerable analytical effort was required simply to understand what constituted earnings, capital and risk, let alone to value them. In such cases, formal disclosure does not necessarily translate into investor comprehension. When complexity itself becomes a barrier, pricing is driven less by fundamentals and more by sentiment, reinforcing the structural disadvantage faced by retail investors in large, narrative-driven listings.

Merchant bankers are the principal architects of IPO pricing, positioning and investor messaging. Their incentives are straightforward: complete the transaction at the highest feasible valuation, ensure subscription success, and move on. There is no meaningful consequence, regulatory or reputational, if a stock significantly underperforms after listing, provided disclosures were formally adequate. The post-listing trajectories of many companies — Paytm, Nykaa, Ola and LIC — illustrate this clearly. Each was priced on ambitious assumptions of scale and profitability; in most cases, markets later revised those assumptions, after capital had already been raised and redistributed.

This is not a question of legality. It is a question of accountability.

India’s regulatory framework places overwhelming emphasis on disclosure rather than economic substance. SEBI scrutinises prospectuses for completeness, risk-factor articulation and procedural compliance. But it does not meaningfully interrogate whether valuation assumptions are internally coherent, whether peer comparisons are selectively constructed, or whether the implied path to profitability is realistic. Pricing is left entirely to “market discovery,” even when information asymmetry between issuers and retail investors is pronounced.

Merchant bankers thus operate in a space where upside is privatised and downside is socialised. They are gatekeepers in theory, but sales agents in practice. Unlike auditors, they face no post-event scrutiny linked to outcomes. Unlike credit-rating agencies, at least after repeated failures, they are rarely questioned when optimistic assumptions unravel. Responsibility ends at disclosure, not at judgement. Why can’t there be a formal rating for them?

The contrast with how established companies are treated is striking. Firms with long operating histories — banks, manufacturers, infrastructure companies — are valued on near-term earnings growth, return on equity and margin stability. Minor disappointments are punished severely. During the same period that loss-making platform companies commanded premium valuations, profitable, cash-generating firms were dismissed as ex-growth or “value traps.”

This divergence is driven less by investor naivety than by institutional incentives. For fund managers, relative performance matters more than absolute return. Owning a high-profile IPO that disappoints alongside peers carries less career risk than holding an unfashionable but profitable stock that lags a momentum-driven index. Merchant bankers respond rationally to this demand by supplying narratives that justify ambition.

Retail investors are drawn into this ecosystem through oversubscription headlines, anchor participation and fixation on listing-day gains. IPOs are framed as accessible opportunities rather than long-term ownership decisions. Losses, when they arrive, tend to be gradual and dispersed, long after anchors and early investors have exited.

India has also imported the late-stage Silicon Valley IPO model without importing its disciplining mechanisms. In the US, aggressive valuations are eventually challenged by activist investors, deep short-selling markets and litigation risk. In India, these checks remain weak. Price discovery still occurs, but often belatedly.

None of this suggests that IPOs should avoid risk or that growth narratives are illegitimate. Capital markets exist precisely to fund uncertainty. But risk pricing requires intermediaries who are accountable not just for process, but for judgement.

The policy question is therefore unavoidable: should merchant bankers bear greater responsibility for the outcomes of the deals they bring to market? This need not imply price controls or regulatory micromanagement. It could involve closer scrutiny of valuation frameworks, post-listing performance reviews, and reputational consequences for repeated mispricing. Disclosure alone cannot substitute for stewardship.

India’s IPO market is not broken. It is functioning exactly as its incentives dictate — rewarding optimism early and deferring economic judgement. Episodes such as the Ola promoter sell-down merely remind investors of what the system quietly assumes: that when insiders sell confidence, public markets are left to buy hope.