Data shows that 50-70% of funds raised in recent Indian mainboard IPOs are Offer-for-Sale (OFS) components, where early investors sell their stakes. This shift means more capital is going to exiting shareholders rather than into the company’s business operations. Investors should check the IPO offer document to distinguish between money raised for expansion and money being used as an exit route for existing shareholders.
The landscape of the Indian primary market is evolving as Initial Public Offerings (IPOs) increasingly function as a path for early-stage backers to exit. Recent market data indicates that between 50 percent and 70 percent of capital raised through mainboard IPOs over the past three years involves Offer-for-Sale (OFS) activity. This means a significant portion of the money collected from public investors is going directly to existing shareholders, such as promoters, private equity, and venture capital firms, rather than into the company's own balance sheet.
Understanding the Difference Between IPO Components
When a company goes public, it typically raises money through two methods: a 'Fresh Issue' and an 'Offer-for-Sale' (OFS). A Fresh Issue involves the company creating new shares, and the money raised is usually spent on capital expenditure, paying off debt, or working capital. This is generally viewed as capital formation. Conversely, an OFS does not result in the company receiving any new cash. Instead, existing shareholders sell their shares to the public. While an OFS is a standard part of many listings, the current high proportion of these sales highlights a trend where the primary market is being used as a strategic exit ramp for those who invested in the company’s early growth stages.
Valuation and Market Context
Market data suggests that for many recent listings, valuation multiples have reached around 21.6x EV/EBITDA. This valuation level reflects the strong demand from retail and institutional investors for new stocks. However, such high valuations, coupled with a large OFS component, invite careful examination from investors. High valuations can sometimes reflect peak market sentiment, and when coupled with significant exits by early backers, it raises questions about the long-term growth expectations for the company versus the realization of returns by early investors.
Why Skin in the Game Matters
For long-term investors, the concept of 'skin in the game' is crucial. This refers to the portion of the company still owned by the promoters after the listing. When promoters and early investors reduce their holdings significantly through an IPO, it can signal that they have achieved their target returns and are reducing their exposure to the business. Investors often prefer companies where the management retains a significant stake, as it aligns the interests of the promoters with those of the public shareholders. A reduction in stake does not automatically mean a lack of confidence, but it is a factor that influences how the market perceives future commitment.
What Investors Should Track
Before investing in an IPO, the most important step for investors is to read the 'Objects of the Offer' section in the Red Herring Prospectus (DRHP). This document clearly breaks down the split between Fresh Issue and OFS. If a large percentage of the issue is an OFS, it is vital to assess whether the company has sufficient existing resources to fund its growth plans without needing fresh capital. Investors should also focus on the company's business model, future profit projections, and the competitive environment to ensure that the high valuation is supported by tangible business performance rather than just current market liquidity.