IPO craze in India: Exciting Opportunity or Expensive Gamble
Every few weeks, a new IPO hits the headlines. Friends forward WhatsApp messages. Your broker sends an alert. Everyone seems to be applying. But most people investing in IPOs have never stopped to ask: what exactly is an IPO, how does it work, and is it actually right for me?
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IPO craze in India: Exciting Opportunity or Expensive Gamble
When Zomato listed on the Indian stock exchanges in July 2021, it was one of the most talked-about IPOs in recent memory. Millions of Indians applied. The issue was subscribed over 38 times meaning for every share available, 38 people were competing for it. On listing day, the stock opened at a premium. Everyone who got an allotment felt like a winner.
Two years later, Zomato's stock had fallen nearly 70% from its listing price before recovering. Many retail investors who held on or worse, bought more after listing — were sitting on significant losses.
The lesson wasn't that Zomato was a bad company. The lesson was that hype and quality are not the same thing and most people who applied to that IPO hadn't stopped to understand either.
So what exactly is an IPO?
IPO stands for Initial Public Offering. It is the process by which a private company offers its shares to the public for the first time essentially inviting ordinary investors to become part-owners of the business.
Before an IPO, a company is privately held owned by its founders, early investors, and venture capital or private equity firms. When the company decides to "go public," it lists its shares on a stock exchange (NSE or BSE in India), allowing anyone with a demat account to buy and sell those shares.
Companies go public for several reasons: to raise capital for expansion, to allow early investors to exit, to improve brand credibility, or to fund debt repayment.
How does an IPO work in India?
The company, along with investment bankers, decides on a price band- a range within which investors can bid for shares. For example, ₹72–₹76 per share.
The IPO is open for subscription for 3 days. Retail investors apply through their broker, bank, or UPI-linked app using the ASBA (Application Supported by Blocked Amount) mechanism: meaning your money is blocked in your account, not debited, until allotment.
If the IPO is oversubscribed- more applications than shares available - allotment is done through a lottery system for retail investors. You may apply and receive nothing.
If allotted, shares are credited to your demat account 6 days after the issue closes. The stock then lists on the exchange, and trading begins.
The allure and the reality
The excitement around IPOs is understandable. Listing gains where a stock opens significantly above its issue price on day one- create stories of quick profits. In India, several IPOs have delivered 50–100% listing gains in recent years.
But the data tells a more complete story.
A study by SEBI analysing IPO performance in India found that a significant portion of IPOs underperform the broader market indices over a 1 to 3-year period after listing. The listing pop is real but it often benefits those who sell on day one, not those who hold expecting long-term growth.
The reasons are structural. Companies typically go public when markets are buoyant and valuations are favorable for the company, not necessarily the investor. Investment bankers are incentivized to price IPOs aggressively. And retail investors, driven by FOMO and media hype, often pay a premium for a business they haven't evaluated.
What to evaluate before applying to any IPO
This is where most retail investors skip the homework entirely.
The company's business model: Does it make money? Is the business model proven and sustainable? Many IPOs in India particularly in the new-age tech space have listed with negative EBITDA, meaning they were not yet profitable at the time of listing.
The purpose of the IPO: Read the Red Herring Prospectus (RHP): the document every company must file with SEBI before an IPO. Look at the "Objects of the Issue" section. Is the money being raised for growth and expansion? Or is it primarily an Offer for Sale (OFS: where existing investors are simply cashing out? An OFS-heavy IPO means the company receives none of the money. Early investors are exiting, and you are buying their shares at the peak of their preferred exit timing.
Valuation: Compare the IPO's Price-to-Earnings (PE) ratio and Price-to-Sales ratio against listed peers. If a company is asking you to pay 80x earnings when its sector peers trade at 30x, you need a very compelling reason to justify that premium.
Promoter background and governance: Who runs the company? What is their track record? Have they built businesses that create value for public shareholders — or a history of related-party transactions and governance concerns?
Listing gains strategy vs. long-term holding
Many experienced retail investors approach IPOs purely as a listing gains play apply, get allotted if lucky, sell on listing day if there's a premium, exit. This is a valid strategy if you understand the mechanics and accept that allotment is not guaranteed.
It is not, however, a long-term investment strategy. Treating IPO allotment as "getting in early on a great business" only works if you've actually done the work to confirm it is a great business at a fair price.
As legendary investor Warren Buffett has noted and Indian investors would do well to remember in an IPO, you are buying from insiders who have chosen this moment to sell. That asymmetry of information should always give you pause.
Should you invest in an IPO?
Apply if: you have read the RHP, understand the business, believe the valuation is fair relative to peers, and are comfortable holding through post-listing volatility.
Apply cautiously if: you are interested in listing gains only and have a clear plan to exit if the listing is flat or negative.
Do not apply if: you are investing because everyone around you is, because the grey market premium is high, or because a WhatsApp forward said it's a "sure shot multi-bagger." These are not investment reasons.
And always remember you can buy any listed company's shares on any trading day you don't have to catch the IPO to invest in a good business. Waiting for the post-listing dust to settle and evaluating the company with 6 months of market data is often the smarter move.
The bottom line
IPOs are not inherently good or bad investments. They are opportunities and like all opportunities, the outcome depends entirely on how well you evaluate them before saying yes.
The next time your WhatsApp group lights up about a "blockbuster IPO," take 30 minutes to read the RHP. Look at who's selling. Check the valuation. Ask if you'd invest in this business if it were already listed and nobody was talking about it.
If yes, go ahead. If not, the market will be open tomorrow, and a better opportunity will come.
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Disclaimer: This content is for educational purposes only and does not constitute financial, investment, or legal advice. Consult a SEBI-registered investment adviser before making any investment decisions. Equity investments, including IPOs, are subject to market risks.
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