IPOs Have Changed. It’s Time Regulation Caught Up With Reality 

In response to my piece India Should Discourage Excessive Investments in Equities published on June 18, 2026, one point raised was that investing in stocks needs to be incentivised because companies raise capital through initial public offerings. It allows entrepreneurs to raise money at a scale which wasn’t previously possible.

Theoretically there is nothing wrong with the argument – it’s straight out of a textbook.

It reminds me of how I was first introduced to derivatives while reading a textbook: A farmer is about to sow wheat. They don’t know the price they are likely to get when it’s time to sell. Hence, they hedge themselves by buying a derivative and locking in the price at which they will sell the wheat. 

According to textbooks, hedging remains the main reason to buy derivatives. 

But anyone who has seen the explosion in the volume of derivatives being traded and the kinds of derivatives that are available these days is more than likely to conclude that speculation, and not hedging, is the number one reason to buy them. (I just heard an advertisement on an FM radio channel telling people that it was possible to make money through weather derivatives.) 

Now, speculation has its uses, but it also introduces risks into the financial system that weren’t there earlier. The financial crisis of 2008 showed that very clearly.

So, the point is that the purpose of things can change, while textbooks take time to catch up.

As textbooks explain, IPOs allow entrepreneurs to sell shares, dilute their ownership in a firm and use the money raised to build or expand their business, and thus help channelise financial savings into useful economic activity.

But times have changed. Now, it’s not just about that. 

As economist John Kay writes in Other People’s Money: “The first companies to obtain listings on modern markets were companies like railways and breweries, with large requirements for capital for very specific purposes… Early utilities and manufacturing corporations raised large amounts of money in small packets from private individuals.”

This was the main function of an IPO over the years, and the textbooks continue to reflect that. But this has changed. 

As Satyajit Das writes in The Age of Stagnation: “The nature of stock markets has been changed by alternative sources of risk capital: the high cost of a stock market listing, particularly increasing compliance costs; increased public disclosure and scrutiny of activities, including management remuneration; and a shift to different forms of business ownership, such as private equity.”

This needs to be kept in mind. Many startups and newer firms now go to venture capitalists and private equity firms to raise their initial capital or subsequent funding rounds. The stock market comes into the picture only when these investors or founders want to unload their shares.

Or as Kay puts it: “The stock market is not a way of putting money into companies, but a means of taking it out.” IPOs now provide an exit to founders and existing investors. 

Take a look at the following chart. It plots the total amount of money raised through IPOs over the years, along with the share accounted for by offers for sale. 


Source: primedatabase.com 

There are two ways of selling shares through an IPO. One is to issue and sell fresh shares. The other is to sell existing ones, known as an offer for sale, where the existing shareholders sell their shares and cash in.

As per the above chart, in the last decade, offers for sale have remained higher than 60% of the total money raised through IPOs. In 2025-26, they were at 60.5%, and that worked out to ₹1.08 trillion.

Foreign companies listing their Indian subsidiaries, raising money through offers for sale and taking that money out of India, was a part of this. In 2024-25, the offer for sale figure stood at ₹1.05 trillion.

What this tells us is that IPOs are now primarily exit options for existing investors in firms, and not as textbooks define them to be. 

So what does this mean?
First, one phenomenon that has played out repeatedly over the last few years is that loss-making startups backed by venture capitalists and private equity firms have been listed on the stock exchange through IPOs.

In many cases, existing investors, including promoters, have sold shares to retail investors, mutual funds and insurance companies.

A KPMG report titled IPOs in India points out: “Private equity backed listings increased significantly to 35% of total issuances [in 2025-26] from 28% in 2024-25, signaling accelerated exit activity by promoter investors.”

The trouble is that the loss-making firms or even firms which are barely making any money, are trying to build scale by offering huge consumer discounts. Also, there isn’t much clarity on whether their business model will eventually be viable. Firms can also pivot to some other business model after listing.

Further, the risk of owning such loss-making firms is being outsourced to retail and other investors. As investor Pulak Prasad of Nalanda Capital wrote in a letter to the Financial Times in April 2016: “Unsuspecting retail investors should not be taking the kind of risk venture capitalists take.”

In the zeitgeist that has prevailed over the last few years, where buying stocks has been seen as a one-way ticket to the moon, this is a rather basic point that has been ignored. 

Second, the fact that retail investors are taking on a level of risk they should not be taking is usually explained away by using that old phrase, caveat emptor – let the buyer beware.

If we take this argument to its logical conclusion we can even argue that markets do not need regulators.

But regulators exist precisely because caveat emptor breaks down when one side of the trade – the venture capitalist, private equity firm or promoter selling out of a loss-making business – understands that business far better than the retail investor buying in.

If we accept that asymmetry, the fix isn't to lecture retail investors about risk; it's to change the terms on which these firms are allowed to list in the first place.

In the last few years, venture capital and private equity backed loss-making firms have been allowed to list on the stock exchange by selling a very small proportion of their stake.  

This needs to be discouraged and loss-making firms should be asked to sell a greater proportion of their stake.

This is likely to lead to three things. 

One, it may delay the listing, as having to sell a larger proportion of their stake could make it harder to secure the sky-high valuations that firms have been aiming for.

Two, selling a larger proportion of shares will make it harder for merchant bankers to spin the familiar story of limited supply and overwhelming demand to justify sky-high valuations. Indeed, the current system is a rigged one.

Finally, given that getting an extreme valuation may not be possible, it might just discourage firms from continuing to offer huge discounts in order to build scale, and instead encourage them to focus on building a profitable business.

This isn't a hypothetical concern. Quick commerce and food delivery firms have listed while still burning cash to fund customer discounts, with no clarity on when, or whether, that spending will translate into a sustainable business. E-commerce firms wanting to list have been running the same business model. 

What's had far less scrutiny is what those discounts are doing to the mom-and-pop kirana stores, smaller restaurants and other firms competing against very large firms that can absorb years of losses.

A retail investor buying into the IPO is, in effect, subsidising discounts whose casualties aren’t showing up in the draft red-herring prospectus.

In fact, given the huge competition that exists in this space, how many of these firms will eventually become profitable and survive remains a question. 

So, are IPOs still IPOs? Textbook-wise, yes – a public offering is still a public offering. But what is being offered has changed.

What used to be a way for a business to raise growth capital from the public has, in many cases, become a way for venture capitalists and promoters to hand their risk to the public instead.

The retail investor buying an IPO is rarely funding the next factory or the next expansion. More often, they are simply the last person standing in a game of pass-the-parcel that began years earlier in a private equity or a venture capital term sheet.

Textbooks will take a while to catch up. The regulator shouldn't wait for them to.