By Chander Gupta
Constant spate of Initial Public Offerings (IPOs) has been hitting the Indian markets steadily. A layman investor would think that more and more money is being infused in the companies’ balance sheets with mobilisation of funds through IPOs. A naïve investor would presume that Indian companies are expanding their operations with the infusion of funds gathered through IPOs. But do all the IPOs really strengthen the company’s balance sheet?
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Every company going public must file a Red Herring Prospectus (RHP) with ROC. The RHP can be viewed on SEBI’s website ‘sebi.gov.in’. An RHP is a voluminous document generally consisting of more than 500 pages. But the most critical information is contained on page 1 of RHP itself. Even a small retail investor intending to apply for shares in an IPO should look for key pieces of information in the RHP.
The equity shares which are offered to public through an IPO can be either (i) Fresh Issue or (ii) Offer for Sale (OFS). An IPO can be exclusively Fresh Issue or exclusively Offer for Sale or even a combination of both. Only the Fresh Issue subscription money goes to company’s balance sheet. Fresh Issue amount expands the capital base of the company, thereby helping it to grow and diversify. Fresh Issue amount enhances the Net Worth of a company. Fresh Issue means money being poured into the economy, in a broader sense.
In the case of OFS, the promotors/investors are only divesting their stake through the IPO. Sometimes, the size of the IPO is split between Fresh Issue and OFS. An IPO can be a Fresh Issue of equity shares or Offer for Sale (OFS) of equity shares by Promotors/Investors, or a combination of both.
If you go through the RHPs of companies which have floated IPOs during the current Financial Year (2025-26) so far, you will notice that 65% to 75% of the equity shares offered through IPOs have been OFS. Only 25% or so has been Fresh Issue. What is more concerning is that not only Investors, but Promoters too have been exiting the companies by selling their stake through IPOs. Why would a promoter exit the company which has a promising future?
A retail investor looking to invest in IPO must see whether it is a Fresh Issue or an Offer for Sale. Further, promoters selling their stake, through the medium of IPO, in the company they promoted is a negative signal. Do not think that IPOs necessarily mean more capital for the companies.
Infusion of more capital in the companies, which is possible through Fresh Issue, is a good sign. But sadly, there are more of OFS than Fresh Issue in the IPOs hitting the stands. Further, equity shares under IPOs are sold at hefty premiums. In the cases where IPOs are OFS, the premium is pocketed by selling promoters/investors.
The other thing that a small retail investor must know is whether the company launching IPO complies with Regulation 6(1) of the SEBI (Issue of Capital and Disclosure Requirements). A Regulation 6(1) company meets with laid down requirements of assets, profit, and net worth.
A company which does not meet with 6(1) requirements is classified as Regulation 6(2) company. A Regulation 6(2) company — which does not meet basic requirements of assets, profit, and net worth — is obviously a risky proposition to invest in.
The best option to invest in an IPO, for small retail investors, is a company both offering Fresh Issue and also complying with Regulation 6(1) of SEBI (ICDR Regulations).
The writer is a retired banker.
