Unprofitable Digital IPOs Pose Risk to Indian Retail Investors, Warns Expert

The Indian stock market is seeing a rise in 'digital IPOs', defined by experts as companies that have never achieved profitability and are unlikely to do so. This trend is seen as detrimental, not just for individual investors losing money on overpriced initial public offerings, but also for the fundamental functioning of market economies. A core principle of market economies is that unprofitable businesses should fail, freeing up resources for successful ones. However, the current tech ecosystem allows capital to flow into unsustainable businesses for extended periods, creating market distortions. These unprofitable companies disrupt established sectors like traditional taxis and grocery delivery, often leading to higher prices and worse outcomes for drivers and customers. The article compares this model to India's old public sector, where money flows without profit or efficiency requirements, leading to economic disaster. While foreign venture capital funding such ventures might have been understood as risky, the shift to Indian equity markets adds Indian retail investors as potential victims. An analysis shows many recent 'digital' IPOs are trading below their issue price and are deeply unprofitable. Sophisticated machinery is used to attract retail investors, leveraging the perceived safety of established brands or participation by respected investors, which can be an illusion. Genuine tech success stories like Google and Amazon are rare; most others remain unprofitable. The author advises retail investors to stay away from these IPOs, as they are designed to transfer wealth from them to promoters and early investors. Promoters and early investors possess information advantages and choose to sell when valuations are high and sentiment is euphoric. The recommendation is to invest in companies with proven business models, profits, and reasonable valuations in the secondary markets, rather than gambling on unprofitable businesses.