What makes IPOs fishy these days?

Even your chaiwala seems to be talking about IPOs these days. But do you know what fishy trend is underneath this hype?

IPOs meant something different historically. Companies went public to raise money for expansion, to build something new. But that’s no longer the case.

Today, the story has changed.

Earlier, most of the money raised through IPOs was fresh capital. Between 2001-2015, more than 75% of IPO funds came from the issuance of new shares. Companies used this money to invest, to grow, to create value.

Fast forward to 2024, and it’s a different world.

Now, the majority of funds raised through IPOs come from offers for sale (OFS). In these offers, no new shares are created. Instead, promoters and early investors offload their stakes, taking money out of the business. For example, Hyundai Motor India’s recent IPO raised all its roughly ₹28,000 crore through an offer for sale, a massive shift from what IPOs used to be.

As of October 2024, nearly two-thirds of IPO money came from such sales. In fact, from 2020 to now, a whopping ₹216,563 crore out of ₹335,027 crore has come from offers for sale. The days of IPOs financing new projects seem to be fading.

What changed?

Companies now rely on venture capital, private equity, and wealthy individuals to raise capital. When these investors need an exit, IPOs offer them a way to cash in. And with the booming stock market, promoters see an opportunity to make money by selling to eager retail investors.

But does this help the business grow? Not really. In many cases, the money doesn’t go into expansion; it goes towards debt repayment or general corporate purposes.

IPOs, once a path for creating shareholder value, have become a way for cashing out.

Ps- I create content to help retail investors become informed investors.

Image credits: Business Today.