What has been whispered for long was coherently amplified by India’s Chief Economic Advisor, V Anantha Nageswaran, at a recent industry conclave. While appreciating the rapid growth of India’s equity markets, he said initial public offerings (IPOs) are increasingly used by early investors to exit from the business, rather than for raising long-term capital. The IPO is primarily designed to assist private companies raise funds from investors to pursue growth. In the process, both primary promoters as well as secondary investors benefit. However, most of the nearly ₹65,000 crore that 55 Indian companies raised in the first half of the current financial year was through offers from existing investors. This meant the companies benefited from only a very small quantum of the shares issued.
The CEA rightly underlined that capital markets “must develop not just in scale, but in purpose”. Entrepreneurship must ideally have a long-term vision to produce wealth for both investors and the nation. However, in recent years, business ventures, especially in the tech and fin-tech sectors, have been launched primarily with an eye on attracting super-high valuations through souped-up performance promises; and the IPO route has been used to cash out. Without vision and a plan, many of these businesses turn out duds, and investors lose money.
Digital payments giant Paytm had one of the largest IPOs in November 2021, with a valuation of $18.7 billion. However, its stock price dived more 70 percent soon after listing because the overinflated valuation was not supported by a clear path to profits. However, there cannot be an iron wall between IPOs being instruments to raise public funds and serving as pathways to disinvest on good performance. Early investors do have the right to benefit from their risk-taking. Venture capitalists and angel investors typically invest in a business idea before its time; if it does well, they should have the option of exiting or selling a part of their holding. As the Securities and Exchange Board Chairman T K Pandey pointed out at the same conclave, IPOs come in many forms. In some cases, investors who have already raised capital privately choose to opt out through an IPO. What is needed is a balance: one where IPOs help companies grow and reward those who take risks.