According to current data, 42 initial public offerings (IPOs) raised about Rs. 78,000 crore as of the end of October 2024 for the current fiscal year 2024–2025. With more than five months remaining in the fiscal year, this is the largest sum ever raised by firms through initial public offerings (IPOs), with the exception of 2017–18, when they raised Rs. 81,553 crore, and 2021–22, when they raised over Rs. 1,10,000 crore. Naturally, these figures are absolute and do not account for the size of the Indian economy.
IPOs have traditionally been viewed as a means for businesses to raise capital to support new ventures and corporate expansion by selling new shares to the general public. The purpose of stock markets is to make it easier to raise money to fund project investments. Companies with high capital requirements for particularly specialized objectives, like as railroads, were the first to be listed on present-day stock markets. It is costly to build a railway network, and once it is constructed, it can only be used to operate trains.
However, it is the story of the past. ‘Offers for sale’ accounted for a significant portion of the money obtained through IPOs in India thus far in 2024–2025. In an ‘offer for sale’, no new shares are issued. Instead, the public purchases shares from a company’s promoters and their existing major shareholders.
Through its IPO, Hyundai Motor India recently raised Rs. 28,000 crore. In reality, the whole amount obtained through this IPO was from an ‘offer for sale’. We must take into consideration the magnitude of the current IPO market in order to obtain a more comprehensive view of this Hyundai ‘Offers for sale’. What was the state of the primary market prior to this IPO? According to data, offers for sale accounted for over 49% of the IPO funds raised thus far in the 2024–25 fiscal year prior to Hyundai Motor’s IPO. However, this has increased to almost two-thirds after Hyundai’s IPO. In fact, offers for sale have accounted for over half of the IPO funds raised in every year since 2015–16. This has been going on for about ten years in that regard.
Data from the beginning of 2015–16 until this year shows that IPOs have raised Rs. 4,94,375 crore so far. More than 68% of this, or Rs. 3,38,759 crore, has been raised through offers for sale by promoters and existing shareholders. In the more recent time frame from the beginning of 2020–21, initial public offerings (IPOs) have raised Rs. 3,35,027 crore. Almost 65% of this, or Rs. 2,16,563 crore, was raised through offers for sale.
Thus, the issuance of new shares has accounted for around only one-third of the funds obtained through IPOs. This should indicate that a third of the funds were obtained for business development and new investments. But that isn’t actually the case. It is not always the situation that the newly generated funds are used to expand the firm. In a number of instances, it has also been used for general business reasons or debt repayment.
It is obvious that the motivation behind Indian firms’ IPOs has evolved over time. More than 75% of the Rs. 1,71,676 crore raised between 2001–02 and 2014–15 came from the sale of new shares, according to the data.
Some would contend that the 2012 SEBI regulation prohibiting promoters from owning more than 75% of stake in listed firms is the reason behind the rise in offers for sale in recent years. However, this isn’t entirely correct because promoters are selling off their shares way below the 75% threshold. In the past, only promoters were able to take part in a offer for sale. However, now, any shareholder who owns more than 10% of the company can sell their shares.
These figures demonstrate that the Indian IPO market’s framework has, in fact, evolved. The IPO’s goal is to show previous investors that their shareholdings have worth and hence to allow them to realize that value. The goal of listing on a stock market has nowadays become for the promoters and company to allow money to be taken out of the firm rather than to put money back in.
This is how things are now. Alternative investment sources, including private equity, venture capital, angel, and other business ownership models, have altered the character of stock markets. These days, a lot of businesses raise money from wealthy people, private equity investors, and venture capitalists. These investors require an exit a few years later in order to profit from their investment, and initial public offerings (IPOs) offer that option.
Naturally, the rise in offers for sale is partly a result of the stock market’s recent upswing, which has encouraged promoters to sell their shares to the general public, especially to individual investors hoping to profit on listing day. Due to the public’s interest in initial public offerings (IPOs), many venture capital-backed businesses with subpar product offerings and business strategies have been able to sell their stocks at high prices on the stock market.
In order to encourage retail and other investors to participate in initial public offerings (IPOs) and support entrepreneurs seeking to raise new funds for company development, capital gains tax from the sale of shares were taxed at lower rates than other forms of income. However, this motive hardly appears to be reaping benefits for retail investors, as well as the business, as the promoters adopting ‘offer for sale’ during IPOs.
The Indian government’s strategy is similarly heading in this direction, aiming to eliminate the comparatively low taxation of capital gains from shares. The marginal rate of income tax should be applied to this income, just like it is to salary income and income from fixed deposits. This will guarantee that the trend in the use of IPO funds will shift in the upcoming years and that shareholders do not commonly leave the firms during IPOs. In other words, funds acquired through an initial public offering (IPO) will be reinvested in the company for expansions or capital expenditures. However, it will take over a decade or so for this to become a reality, so it is not an immediate prospect.
There are two red flags that can be highlighted when these offer for sale come up as IPOs into the market place. One is the promoters trying to abandon the business knowing that the business is a sinking ship (as promoters are the first to know if the company is in trouble or not). The other is that the business may be doing good, but the promoters shall price their ‘offer for sale’ during IPOs way too high through the investment bankers (who assist them while IPO capital raising). They are exorbitantly priced than their intrinsic value.
Hence while these IPOs come into market place as ‘Offer for sale’, retail investors should be cautious before putting in their money into it, and must dig deeper into the reason behind the offer for sale.
