IPO Boom Analysis: Are Funds for Investor Exits, Debt, or Long

The primary market provides investors a chance to participate in the growth story of companies via initial public offerings (IPOs) and potentially buy their shares at lucrative prices. While some investors chase listing gains, others look forward to investing more strategically and increasing the exposure of their sector to new and emerging sectors. As per a research paper by Bank of Baroda (BoB) chief economist Madan Sabnavis, only a quarter of the total funds tapped via public issues has been allocated towards capital expenditure. Additionally, the study also found that money raised via offer-for-sale (OFS) made up a significant part of the total money these companies sought to raise via their IPOs. Prevalence of OFS In IPOs The draft offer documents, as well as red herring documents filed with the Registrar of Companies of 189 firms which raised funds in 2025 via IPOs, were studied as part of the analysis. The data showed that while a total of 1.82 lakh crore was proposed to be raised by the 189 companies, 1.2 lakh crore was raised via the fresh issue of shares, while Rs 62,000 crore or 34.07 per cent of the total funds were raised through offer-for-sale. Typically, early-stage investors and promoters of the company sell their stake in IPOs via the OFS route. A significant amount of funds being raised via OFS can have some consequences for investors, as the proceeds of such a sale go to the selling shareholders, offering them an exit mechanism. If the IPO happens at a high valuation, this often means strong gains for the selling shareholder and promoter as the value at which they acquired the stake is likely to have been lower than the value at which the IPO is being conducted. However, a high OFS figure does not mean the IPO is inherently bad, as there may be genuine business reasons for a stake sale. Devarsh Vakil, Head of Prime Research, HDFC Securities, told Outlook Money that often a stake sale may be associated with compliance with Sebi norms. On the other hand, the prevalence of OFS in fundraises indicates that the money raised via the IPO will not be allocated towards the growth of the company in case of an offer which consists of a complete OFS. For offers that consist of an OFS and a fresh issue, the amount of money which could have been allocated towards the growth of the company reduces. Several industry stakeholders have also flagged major concerns regarding the motivation of companies with high valuations becoming IPO-bound. Chief Economic Adviser (CEA) to the Government of India, Dr V. Anantha Nageswaran, also flagged similar concerns recently, stating that while the growth of the primary market is impressive, IPOs are becoming exit vehicles for early investors. Debt Repayment Trumps Capex Spending The study also found that the proceeds of the public issues were typically used for capital expenditure, investment in subsidiaries, lease payments, branding/marketing, working capital and repayment of debt. However, the maximum allocation out of the proceeds has been made towards debt repayment, followed by capital expenditure. Since the proceeds of OFS go directly to the selling shareholder, a fundraise of Rs 1,19,757 crore has been taken into consideration, minus the Rs 62,000 crore raised via OFS. While 28.8 per cent of the total proceeds were proposed for debt repayment, only 25.9 per cent of the proceeds were proposed for capital expenditure. One of the reasons why companies allocated more funds towards debt repayment is prioritising financial safety over aggressive near-term growth. While a company can alter its capital expenditure spending based on the industry it is in and the asset model it follows, the relatively low funding can also mean that the company is not aggressively investing in the physical assets required for large-scale expansion. A drag on expansion can mean slower growth for the stock, resulting in potentially delayed returns for the investor. To conclude, investors should conduct thorough research and seek financial advice from registered intermediaries to invest in IPOs of companies which align with their investment goals. Vakil advised investors to read the business overview section, financial statements and risks section of the RHP before applying for an IPO. “Investors should read the Business Overview section to understand the products/services offered by the company. An understanding of the financials is important to ascertain the growth of the company and how the company stacks up with its peers. Next, they should read the Risks section to identify potential issues that could impact the business. Utilisation of the proceeds section is vital to comprehend the usage of funds,” Vakil said.