India’s Chief Economic Advisor has flagged a growing trend in the equity markets: many initial public offerings are increasingly serving as exit routes for early investors rather than as pure instruments of long-term capital formation. While this observation has sparked concern, a closer examination suggests something more nuanced — and arguably healthier — is unfolding. What appears as mission drift may, in fact, signal the maturation of India’s capital markets.
Why has the CEA raised concerns about IPOs?
Traditionally, IPOs are viewed as mechanisms to raise fresh capital for expansion, capacity creation, and innovation. When they are dominated by offers-for-sale, where early investors monetise their stakes, questions naturally arise about whether public markets are being reduced to liquidity events rather than growth engines.
The CEA’s concern reflects a legitimate policy priority: ensuring that equity markets continue to support real economic investment and not merely ownership transfers.
What does theory say about the role of IPOs?
In mature financial systems, IPOs serve a dual purpose. They enable price discovery for young or fast-growing firms and facilitate an orderly transfer of ownership from concentrated early investors — such as venture capital and private equity — to a diversified base of public shareholders.
Seen through this lens, exits via IPOs are not a distortion but a feature of deep markets. They recycle risk capital, allowing early-stage investors to fund the next generation of enterprises.
What does the scale of recent IPO activity indicate?
The sheer scale of IPO activity points to confidence rather than fragility. By mid-November 2025, India had already seen around 91 IPOs raising approximately ₹1.52 trillion, nearly matching the total raised in all of 2024. With a strong pipeline, 2025 is poised to set a new record.
Such volumes suggest an ecosystem capable of absorbing supply, pricing risk, and reallocating capital efficiently — hallmarks of a maturing market.
Why are listing-day gains cooling, and why does that matter?
Average listing-day gains have moderated sharply, slipping to about 9 per cent in 2025. While this disappoints investors accustomed to large IPO “pops”, it reflects improving price discovery.
In developed markets, excessive listing gains are seen as a sign of mispricing. Narrower pops indicate better book-building, stronger institutional anchoring, and less value being left on the table — outcomes that favour issuers and long-term investors over speculative trading.
How deep is India’s secondary market today?
Liquidity is what makes exit-led IPOs viable without destabilising markets. India’s secondary markets have achieved remarkable depth. Even during softer cycles, combined cash market turnover on NSE and BSE regularly touches lakh-crore levels. An average daily turnover of over ₹1 lakh crore in mid-2025 underscores the market’s capacity to absorb post-listing churn.
This liquidity acts as oxygen, enabling ownership transitions without sharp dislocations.
Is rapid selling after IPOs a sign of froth?
Data show that more than half of IPO shares allotted to non-anchor investors are sold within a week. While this can be read as speculative behaviour, it can also be interpreted as efficient reallocation.
Such churn allows shares to move from short-term participants to investors willing to hold through business cycles. Over time, this process strengthens price discovery and ownership stability.
What role do SME IPOs play in this transition?
A key indicator of market maturity is breadth, not just size. SME IPOs have surged, allowing mid-sized firms to access public capital. In the first half of 2024 alone, over 150 IPOs — the majority in the SME segment — raised significantly more capital than in the previous year.
This expansion beyond unicorns and mega-caps shows that India’s public markets are becoming accessible across the corporate spectrum.
Are growth IPOs being crowded out?
Despite the rise in exit-led listings, there is little evidence that growth capital is being squeezed out. Total funds raised remain large, investor participation is broadening, and disclosure standards are improving.
Global comparisons show compatibility between exits and fresh capital formation, provided pricing is rational and governance robust.
What risks could derail this maturing phase?
Two risks stand out. First, excessive short-termism could erode investor confidence if too many IPOs trade below issue price for extended periods. Second, weak post-listing performance of large issuances could dampen appetite for future offerings.
Addressing these risks requires better disclosures, clearer articulation of profitability paths, calibrated issue sizes, and stronger post-listing governance — not a clampdown on exits.
What policy role can strengthen the transition?
The CEA’s intervention serves as a constructive nudge. Encouraging clearer use-of-proceeds disclosures, improving transparency between anchor and retail allocations, and tightening norms on earnings guidance and related-party transactions can ensure that public markets do not devolve into pure flipping venues.
Such measures would deepen trust and align exit-led IPOs with long-term market development.
What does this say about India’s capital markets?
High volumes, moderating IPO pops, deep liquidity, and widening participation suggest that India’s markets are evolving toward global maturity. Exit-driven IPOs, when supported by strong regulation and disclosure, are not a weakness but a sign that the system can recycle capital efficiently.
That is what developed markets look like — and it is increasingly where India is headed.
What to note for Prelims?
- Role of IPOs in price discovery and capital formation
- Difference between fresh issue and offer-for-sale
- Importance of secondary market liquidity
- SME IPO framework in India
What to note for Mains?
- Changing role of IPOs in a maturing capital market
- Balancing exit opportunities with growth financing
- Investor behaviour, listing gains, and price discovery
- Policy and regulatory measures to strengthen market depth
