KAAND: The IPO Kaand TACTIC: List at peak hype, primary proceeds go to company, secondary proceeds go to early investors, retail public holds the bag
THE TACTIC IN ONE PARAGRAPH An initial public offering (IPO) is structured to maximize proceeds for the company and its early investors while shifting risk to retail shareholders. The company issues new shares (primary offering) to raise capital, while existing shareholders—venture capitalists, private equity, or founders—sell their stakes (secondary offering) at the same time. The IPO is timed to coincide with peak market hype, often fueled by aggressive marketing, selective disclosures, or temporary industry tailwinds. Once listed, the stock price is propped up artificially through market-making or selective buying, ensuring early investors exit at high valuations. When the hype fades, the stock corrects, leaving retail investors holding overpriced shares while the company and insiders have already monetized their stakes. The tactic relies on information asymmetry, regulatory gaps in disclosure, and the herd mentality of retail investors chasing "listing gains."
HOW IT WORKS IN INDIA SPECIFICALLY India’s IPO ecosystem is uniquely conducive to this tactic due to a combination of regulatory loopholes, institutional weaknesses, and market dynamics. First, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 allow companies to price IPOs through a book-building process, where merchant bankers and institutional investors set the price based on demand. This creates a perverse incentive: bankers, who earn fees as a percentage of the issue size, have little reason to underprice the offering. Second, anchor investors—typically mutual funds or foreign institutional investors—are allocated up to 60% of the issue at the upper end of the price band. These investors often flip their shares on listing day, creating artificial demand that lures retail buyers. Third, SEBI’s disclosure norms require companies to reveal only material risks, not the sustainability of their business models. A company can, for instance, highlight a temporary surge in demand without disclosing that it stems from a one-time government contract or a supply chain disruption.
The gap between SEBI’s oversight and RBI’s role further enables this tactic. Many IPO-bound companies are backed by non-banking financial companies (NBFCs) or private equity firms that have extended debt or equity to the company at inflated valuations. When these companies go public, the IPO proceeds are often used to repay these lenders, effectively transferring risk from private financiers to public shareholders. The judiciary’s slow pace in addressing investor grievances—cases drag on for years—means that even if misconduct is later proven, the perpetrators have already exited with profits. Finally, India’s retail investor base is highly fragmented, with over 90% of demat accounts held by individuals with less than ₹2 lakh in investments. This fragmentation makes collective action against mispricing nearly impossible, while institutional investors, who have the resources to challenge valuations, are often complicit in the hype.
THE HISTORICAL RECORD One of the most documented instances of this tactic was the Reliance Power IPO in 2008. The company raised ₹11,700 crore—the largest IPO in Indian history at the time—despite having no operational power plants. The issue was priced at ₹450 per share, with anchor investors allocated 30% of the shares. On listing day, the stock surged to ₹599, but within a year, it collapsed to ₹50. The company had used the IPO proceeds to repay debt to group companies, while early investors, including private equity firms, exited at the peak. A SEBI investigation later found that the company had misrepresented its project timelines and financial projections, but no penalties were imposed on the promoters. Retail investors, who had subscribed based on the promise of "India’s next energy giant," were left with worthless shares.
Another case was the Suzlon Energy IPO in 2005. The wind turbine manufacturer raised ₹1,500 crore at a valuation of ₹1,000 crore, with the issue oversubscribed 49 times. The company’s prospectus highlighted its order book and global expansion plans, but omitted the fact that it had taken on massive debt to acquire a German firm at an inflated price. Within two years, Suzlon’s stock fell 90%, and the company defaulted on its debt. A parliamentary committee report in 2013 noted that the IPO proceeds were used to repay debt taken for the acquisition, effectively transferring risk from private lenders to public shareholders. The promoters, however, had already sold a portion of their holdings in the secondary offering.
More recently, the Paytm IPO in 2021 followed a similar pattern. The company raised ₹18,300 crore at a valuation of ₹1.39 lakh crore, with anchor investors allocated 60% of the shares. The prospectus emphasized Paytm’s "asset-light" model and market leadership, but did not adequately disclose the company’s path to profitability. On listing day, the stock fell 27%, and within a year, it was trading at a third of its IPO price. A SEBI order in 2023 found that Paytm’s merchant bankers had failed to conduct adequate due diligence on the company’s financials, but no action was taken against the promoters. The IPO proceeds were used to repay debt and fund acquisitions, while early investors, including SoftBank and Ant Group, exited partially.
THE INSTITUTIONS THAT ENABLED IT This tactic thrives because multiple institutions either facilitate it or fail to prevent it. Merchant bankers, such as Kotak Mahindra Capital, ICICI Securities, and Axis Capital, are incentivized to maximize issue size, as their fees are tied to the amount raised. They rarely challenge valuations, even when they appear inflated. Auditors, including the Big Four firms, sign off on financial statements without always verifying the sustainability of revenue streams. In the case of Reliance Power, Price Waterhouse was later found to have failed to flag the company’s aggressive revenue recognition practices.
Rating agencies like CRISIL and ICRA often assign high grades to IPO-bound companies, even when their business models are unproven. In Suzlon’s case, CRISIL had given the company an "A1+" rating for its commercial paper, despite its high debt levels. Mutual funds, which act as anchor investors, have little incentive to question valuations, as they can exit on listing day. SEBI, while nominally the regulator, has limited powers to challenge pricing. Its 2022 discussion paper on IPO pricing suggested introducing a "price discovery mechanism" for loss-making companies, but no concrete changes have been implemented.
THE CURRENT STATE The tactic remains alive and well. SEBI’s 2023 amendments to IPO norms—such as requiring companies to disclose the price-to-earnings (P/E) ratio of their listed peers—have done little to curb mispricing. The gap between primary and secondary proceeds continues to widen, with companies like Tata Technologies (2023) and Mankind Pharma (2023) seeing early investors exit at high valuations while retail shareholders face post-listing corrections. The introduction of the "anchor lock-in"—where anchor investors cannot sell for 90 days—has had minimal impact, as they can still offload shares after the lock-in period. Until SEBI mandates stricter disclosure of unit economics, revenue sustainability, and promoter exits, the tactic will persist.
WHAT TO WATCH FOR 1. Disproportionate secondary sales: If the IPO prospectus shows that a significant portion of the issue (over 30%) is secondary shares sold by early investors, it’s a red flag. These investors are exiting, not the company raising capital. 2. Aggressive revenue projections: If a company’s prospectus highlights revenue growth without explaining the source—such as a one-time contract or a temporary industry boom—be skeptical. Look for footnotes on "sustainable" vs. "one-time" revenue. 3. Anchor investor flipping: Check if anchor investors—especially mutual funds—sell their entire stake on listing day. If they do, it suggests they never believed in the long-term story.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.