Six Out Of 10 Indian IPOs Are Just Shareholder Exits. Should Investors Worry?

If you have invested in an initial public offering in recent years, chances are more than half of your money didn't go towards growing the company—it went to existing shareholders cashing out. Over the last decade, anywhere between 60-80% of IPO proceeds have come from the offer for sale portion, according to Prime Database. That means for every Rs 100 raised, only Rs 20-40 is fresh capital for growth, while the rest is shareholders offloading their stake.

The OFS structure allows different types of shareholders to exit, but the two biggest categories of sellers are company promoters and private equity/venture capital investors.

Since 2020, promoters have accounted for 44-77% of all OFS sales, making them the biggest sellers. Many promoters use IPOs as a way to gradually reduce their holdings while maintaining control. In contrast, PE/VC investors typically contribute 5-19% of OFS amounts, as they look to exit their investments after funding startups in their early stages.

"The rise of PE/VC selling ties in with the evolution of the industry in India," Pranav Haldea, managing director of PRIME Database explained. Private equity and venture capital firms, which took off in the early 2000s, use IPOs as an exit strategy. But they're far from the only ones selling—company promoters frequently offload large stakes too.

There is often skepticism around IPOs where a significant portion of the offer is OFS. Many investors fear that insiders cashing out means they no longer believe in the company's future. However, historical data challenges this assumption.

"In the '90s and early 2000s, a significant portion of IPOs consisted of fresh capital. That didn't necessarily translate into better stock performance," Haldea pointed out, highlighting that just because a company raises fresh funds doesn't mean it will deploy them effectively or generate strong returns for investors.

For those investing in IPOs, the key takeaway is that an IPO's structure—whether it's an OFS-heavy or fresh capital-heavy issue—does not determine its success. What matters is the company's business fundamentals, growth strategy, and industry outlook.