IPOs generated $38 bn in OFS proceeds for promoters, investors — two-thirds of all money raised from IPOs in last 5 years

Large quantities of secondary share sales by company insiders are often viewed with caution in Indian markets, especially by retail investors, but market experts said the pattern is an outcome of a maturing capital-market system rather than a distortion.

Early Investors Realising Gains

According to Kranthi Bathini, director of equity strategy at WealthMills Securities, the current investment cycle is prompting early-stage investors to realise gains.

“As the investment cycle turns and enters an upward trajectory, early-stage investors naturally look for opportunities to exit and realise gains. In a capitalist system, everyone ultimately wants to derive the best possible price for their investment, and the current buoyancy in the markets, driven largely by liquidity, is enabling that,” he said.

He added that many of today’s issuers belong to digital-first and new-age business models, which no longer require massive capital infusion to expand.

“A large share of the companies tapping the IPO market today belong to new-age business models with strong moats. Many of them do not require significant capex at this stage, so they are not coming to the market for fresh capital,” Bathini said.

Bathini believes liquidity remains the defining force behind the ongoing IPO pipeline, backed by a structural shift in domestic savings.

“As long as liquidity remains strong, more business models will continue to come to the public markets. Overall market liquidity remains robust, supported by a structural shift towards financial savings. There is a clear digitalisation of savings, with households increasingly preferring financial assets over physical ones,” he said, adding that investors are far more focused on valuations and long-term prospects than whether a company is raising fresh funds or sellers are exiting.

Market Evolution

Industry veterans argued that a heavy OFS mix should not be viewed negatively.

Pranav Haldea, managing director at Prime Database, noted that the dominance of OFS is a hallmark of market evolution rather than an unfavourable signal.

“I’ve always called this a sign of a maturing capital-market ecosystem. People say ‘fresh capital should come’. But in many cases, fresh capital is going toward debt reduction, which though strengthens the balance sheet, is not going towards growth or expansion. Even when fresh capital goes into expansion, it may not yield the desired outcome. One is betting on whether the company deploys it well and actually generates returns," he said.

Haldea pointed out that earlier decades were characterised by risk capital being raised from the public before a business model was proven.

"If you look at the data from the 1990s and early 2000s, the majority of IPOs then were fresh capital. But we all remember how those IPOs fared. Those IPOs were raising ‘risk capital’ from the public market. Today that risk capital is being provided by angels and VCs. Only companies that reach a certain size, scale and governance standard come to the IPO market. That is a much healthier evolution," he said.

With two-thirds of the funds raised through public issues going towards shareholder exits, the debate around “too much OFS” regularly resurfaces.

Haldea argued that the metric has little relevance in evaluating the merit of an IPO.

"The focus at the time of making an IPO investment should not be ‘fresh vs OFS’. It should be just two things - the quality of the company and the valuation at which it is coming," he said, adding that even in terms of post listing returns, he has found that pure OFS IPOs have delivered better average returns than pure fresh-issue IPOs.

Despite occasional concerns around promoter or PE-led profit-booking, analysts said the enormous spike in OFS proceeds simply reflects the depth of buy-side demand and the growing investor faith in the future earnings potential of India Inc.

As long as liquidity remains abundant and domestic participation in equities continues to strengthen, issuers, whether seeking capital or exits, are likely to keep tapping the IPO market at scale.