How IPO reforms created a new kind of investor euphoria

The Indian initial public offering (IPO) market has undergone multiple path-breaking reforms over the last five years—deepening participation, expanding the investor base, and drastically shortening IPO cycles.

The current IPO boom is a direct outcome of these reforms.

By tightening timelines and ensuring that only the amount required for allotted shares leaves an investor’s account, Sebi transformed the IPO experience. The old pain of waiting for refunds, tracking missing funds, or chasing registrars is now gone. Under the applications supported by blocked amount (ASBA) mechanism, investors’ money stays in their bank accounts even as they bid for IPO allotments.

These reforms permanently changed the Indian IPO market. But they also brought a new behavioural challenge.

Luck over logic

Investors began to see IPOs as a short-term “lottery” for idle funds—money that could sit risk-free in their account for eight days while chasing a listing gain. The equity risk inherent in IPO investing was increasingly overlooked for the convenience of a quick punt.

Meanwhile, the large reservation of shares for institutional investors shifted a chunk of the risk from retail buyers to mutual funds. When institutions showed strong buy-in, IPOs seemed almost guaranteed to succeed.

For institutional investors, anchor allotments became an easy and assured route to deploy large sums efficiently. Each successful IPO attracted more participants, and the IPO cult took firm shape over the last two years.

Today, retail investors often rush into IPOs not for ownership or conviction—but because they see them as the fastest route to short-term profits.

The pricing problem

As retail and institutional interest surged, investment bankers grew bolder, pushing promoters to raise valuations aggressively. Blind support from investors emboldened issuers to overprice IPOs.

The result: in several recent issues, the traditional listing-day pop has disappeared. Many habitual IPO investors are now facing losses instead of quick gains.

It was against this backdrop that the Lenskart IPO arrived. While its valuations were undeniably stretched, the social media outrage that followed was more a symptom of investor frustration than a critique of fundamentals.

The undercurrent of disappointment among investors flared up into all-round outrage as informed people strongly felt that they will not be able to make money at all.

Lenskart’s aggressive pricing left little on the table for investors, relying instead on market comfort post-listing—a move that hit a raw nerve.

Still, the issue went through successfully. Despite the noise, the market ultimately stood by Lenskart.

Lessons for the future

The larger lessons from this episode are worth noting.

Firstly, companies approaching the market must give some headroom for growth in share price after listing. They need to price their IPOs in such a way that they don’t discount the earnings from the very distant future.

They should also give confidence to investors through better messaging and provide adequate transparency on the justification behind their valuations. Hiding behind what is the minimal regulatory requirement is not going to get respect of the investor community, given the aggressive fund raising needs and the elevated valuation of IPOs.

Investment bankers must wake up and advise firms more responsibly rather than trying to promise them higher valuations just to get the bigger mandates.

With most IPOs only selling 10% of equity in the issues, the companies need to dilute further to reach the minimum statutory public holding limit of 25% in due course.

Taking a reasonable stance in the IPO will give shareholders ample confidence to give companies the required support when it returns to sell more stock through follow-on issues and to reach its minimum public shareholding limit.

A more mature, empathetic and fair IPO ecosystem is what the reforms were meant to deliver to the investing public. It is time all stakeholders rise to the occasion and fulfil that expectation. It is a moral obligation they owe to the investing public and to the regulatory intent which brought these changes for the long term growth of the Indian equity cult.