Why I Stay Away From IPOs

Imagine spending ten years building a company. You started small, raised money from venture capitalists, hired hundreds of employees, built a recognisable brand, and convinced investors that your business could become one of the biggest players in its industry.

Now imagine the stock market is willing to value your company at ₹15,000 crore, even though private investors valued it at a fraction of that amount just a few years earlier.

What would you do?

You would probably consider going public. Your early investors could finally sell some of their holdings. You could raise additional capital. Your company would receive national attention, and its shares would begin trading on the stock exchange.

Meanwhile, on the other side of that transaction, thousands of retail investors are checking grey market premiums, calculating potential listing gains, and hoping to receive an allotment.

One group is preparing to sell. Another group is desperate to buy.

And somehow, both believe they are getting a wonderful deal.

This contradiction explains why I rarely get excited about IPOs. Not because every IPO is bad, or because listing gains are imaginary. Some newly listed companies have created extraordinary wealth.

But an IPO combines a carefully marketed growth story, a price designed to complete a transaction, and an allotment process that determines whether ordinary investors can participate at all.

Sometimes, an IPO is a great investment opportunity.

Sometimes, it is simply a great opportunity for someone else to sell.

01 — The Numbers Behind the IPO Excitement

Let's begin with something that might surprise you. If someone tells you most IPOs list at a loss, the historical data do not support that statement.

In a sample of 446 Indian mainboard IPOs between 2016 and 2025, approximately 324 closed above their issue price on listing day. That's nearly 73%, while the remaining 27% failed to close at a premium.

At first glance, this sounds attractive. If nearly three out of four IPOs deliver positive first-day closing returns, why shouldn't everyone apply?

But the numbers tell a very different story when examined across market cycles.

In 2023, approximately 86% of IPOs in the sample closed above their issue prices. In 2018, that number was barely 52%. The median first-day return was approximately 21.1% in 2024, but fell to around 5.1% in 2025.

The same strategy can appear extraordinary in one market environment and deeply ordinary in another.

IPO listing gains certainly exist. But they are not a stable, predictable source of returns. They depend on the market cycle, investor enthusiasm, deal valuation, and demand when trading begins.

And there is another important detail.

Those historical returns assume you actually received the shares.

That assumption is where the entire story begins to change.

02 — The IPO Everyone Wants Is Often the IPO Nobody Gets

Imagine an IPO priced at ₹15,000 per lot. The business looks promising, valuations seem reasonable, and market sentiment suggests the stock could list at a 30% premium.

If you receive an allotment, you might earn approximately ₹4,500 before taxes and costs. Not bad for a trade lasting a few days.

But suppose the retail allocation is sufficient for only 5% of eligible applications.

Your probability of receiving shares is just 5%. Under these simplified assumptions, the probability-weighted profit per application is ₹225 rather than ₹4,500.

Now imagine identifying five similarly attractive IPOs during the year, each offering an independent 5% probability of allotment.

Even after applying to all five, the probability of receiving no allotment at all would be approximately 77%.

Think about that for a moment.

You could identify five attractive opportunities, study their financial statements, evaluate management quality, apply correctly, and still finish the year without receiving a single share.

Meanwhile, someone who barely understands the underlying business might receive an allotment.

That is not a criticism of the allotment system. It is simply how heavily oversubscribed IPOs work.

And this creates an interesting imbalance.

The IPOs expected to deliver the strongest listing gains frequently attract the fiercest competition for allotment. The weaker offerings may be easier to obtain, but expose investors to greater listing risk.

I can improve my ability to evaluate businesses. I can become better at understanding earnings, industry cycles, management quality, and valuations.

But I cannot improve my research enough to guarantee winning an allotment lottery.

That makes IPO investing fundamentally different from the kind of investment process I prefer.

03 — Nykaa: When a Beautiful Business Meets an Expensive Valuation

Let's travel back to November 2021.

India was experiencing extraordinary enthusiasm for technology companies and consumer internet businesses. Investors were eager to participate in the country's digital growth story.

Nykaa appeared to have almost everything the market wanted: a recognisable consumer brand, an expanding beauty industry, a respected founder, and a compelling story about the future of Indian consumption.

Its IPO was subscribed approximately 82 times.

The issue price was ₹1,125 per share. When the stock opened around ₹2,001, investors who received an allotment were sitting on a gain of nearly 78%.

Imagine how exciting that must have felt.

Now consider another investor who missed the allotment. They watched the successful listing, saw the excitement building, and decided they didn't want to miss the opportunity entirely.

They eventually bought shares near ₹2,574.

Within roughly a year, the price had fallen to around ₹1,109 on a comparable pre-bonus basis, representing a decline of approximately 57% from the peak.

The company hadn't disappeared. Its brand hadn't become worthless. Indian consumers hadn't stopped buying beauty products.

What changed was the market's willingness to pay an extraordinary valuation for future growth.

Nykaa wasn't the only example.

LIC came to the market in 2022 with the familiarity and reputation of one of India's largest financial institutions. Its IPO price for general investors was ₹949. Yet the stock listed below that price and was down roughly one-third about a year later, before recovering.

Paytm offered an even more dramatic example. Its 2021 IPO was priced at ₹2,150, but the stock listed at a discount and eventually traded near ₹310 in May 2024, before staging a substantial recovery.

These businesses had different fundamentals, challenges, and subsequent recoveries. They should not be treated as identical investment stories.

But they demonstrate the same fundamental principle.

A great brand, a famous founder, or an exciting industry does not automatically make a stock attractive at every valuation.

And that brings me to an even more uncomfortable question.

04 — Why Are the Existing Investors Selling?

Whenever I read about a large IPO, I try to ignore the headline fundraising amount for a moment.

Instead, I open the prospectus and look for two things: how much money the company is actually receiving, and how much is going to existing shareholders.

There is an important difference between the two.

When a company issues fresh shares, the proceeds enter the business. They can fund expansion, reduce debt, finance acquisitions, or support other disclosed objectives.

But when existing shareholders sell their holdings through an Offer for Sale, or OFS, the money goes to them.

It does not enter the company's bank account.

Consider Nykaa again.

Its approximately ₹5,352 crore IPO included around ₹630 crore of fresh capital. The remaining ₹4,722 crore represented an Offer for Sale.

In other words, approximately 88% of the transaction involved existing shareholders selling their ownership rather than fresh capital entering the company.

And this was not an isolated example.

According to reported Prime Database figures, approximately 57% of India's IPO fundraising in calendar 2025 came through OFS transactions.

KPMG reported that OFS represented approximately 64% and 67% of IPO fundraising in FY22 and FY23, respectively.

These numbers do not establish that most IPOs are fraudulent or that selling shareholders secretly expect their businesses to fail.

There are perfectly legitimate reasons for selling ownership. Private equity funds must eventually return capital to their investors. Founders may want liquidity after years of building their businesses. Governments may divest stakes in public-sector enterprises.

But the incentives are worth understanding.

A selling shareholder wants an attractive price today. A new shareholder wants an attractive return tomorrow.

Those two objectives are not necessarily aligned.

During periods of extreme enthusiasm, existing investors may have an unusually attractive opportunity to monetise their holdings.

I often wonder why retail investors spend so much time asking whether an IPO will list at a premium, but comparatively little time asking whether the people selling their shares are receiving an exceptionally favourable valuation.

The second question may be far more important.

05 — The Grey Market Premium: When Expectations Become a Story

There is something fascinating about how IPOs are discussed in India.

Before the company even lists, almost everyone seems to know its GMP.

Someone says the grey market premium is ₹60. A Telegram channel reports that it has increased to ₹90. A financial website shows ₹110.

Suddenly, people who hadn't heard of the company a week earlier are calculating how much money they might make.

But what exactly is a grey market premium?

It is an unofficial market quotation operating outside the regulated stock exchange. Unlike regular exchange trading, underlying transactions, genuine volumes, and counterparties may not be transparently visible.

That creates the possibility of misleading quotations, exaggerated expectations, or deliberate influence by interested participants.

This does not establish that every GMP is manipulated. But the absence of transparency is reason enough to treat it cautiously.

Imagine a hypothetical IPO priced at ₹300.

Initially, the reported GMP is ₹20. A few days later, excitement builds and the quote reaches ₹100.

Investors now expect the stock to list around ₹400.

But when the company finally lists, the opening price is ₹315.

The expected 33% gain becomes just 5%.

Nothing in this hypothetical example requires the company's fundamentals to have changed. Market expectations simply moved much faster than the eventual trading price.

One independent GMP-tracking analysis reported that its forecasts overstated realised outcomes in approximately 58.5% of a sample of 282 IPOs. That is a tracker-specific finding, not an audited market-wide statistic.

For me, the biggest danger is psychological.

The moment investors see a high GMP, they begin imagining profits before they even own the shares.

And once an imagined profit starts to feel real, it becomes much easier to ignore the risks.

06 — What SEBI Discovered About IPO Investors

In September 2024, SEBI published an interesting study examining investor behaviour across 144 mainboard IPOs listed between April 2021 and December 2023.

It found that approximately 54% of allotted IPO shares by value, excluding anchor investors, were sold within just one week.

Individual investors had sold around 70% of the value of their allotted shares within one year.

But the most revealing finding concerned how investors reacted differently to profits and losses.

When an IPO generated returns exceeding 20%, individual investors sold approximately 67.6% of their allotted share value within a week.

When an IPO was loss-making, they sold only 23.3%.

Think about what that means.

When an IPO delivers attractive profits, investors are eager to sell. But when the trade goes wrong, many suddenly become long-term shareholders.

The investment they intended to sell on listing day becomes something they might hold for several years.

Behavioural finance calls this the disposition effect: the tendency to realise profits quickly while delaying the recognition of losses.

It is a familiar human weakness. We love booking profits because it confirms that we were right. We avoid booking losses because doing so forces us to acknowledge that we might have been wrong.

This is one reason IPO trading can become more complicated than it initially appears.

A simple listing-gain strategy can quietly turn into an unintended long-term investment.

07 — The Five-Year Question Nobody Asks on Listing Day

Imagine an IPO opening at a 70% premium.

Television channels celebrate it. Social media fills with screenshots. The company becomes one of the most discussed stocks in the country.

But what happens to someone purchasing those shares at that elevated listing price?

That is the question I care about.

An NSE-based analysis of Indian mainboard IPOs found that approximately 43% of eligible companies outperformed the Nifty 500 over one year, measured from listing-day closing prices.

Over three years, the figure declined to around 40%. Over five years, it was approximately 41%.

In other words, roughly six out of ten IPOs in the relevant longer-term samples failed to outperform the broader benchmark.

Even more interesting is the difference between average and median returns.

The mean three-year post-listing price return was approximately 62.6%.

That sounds excellent.

But the median cumulative return was just 9.8%, equivalent to roughly 3.2% annualised over three years.

Why such an enormous difference?

Because a relatively small number of extraordinary winners can lift the arithmetic average.

Imagine ten stocks. Nine generate no returns, while the tenth rises 500%.

The group's average return becomes 50%.

But nine out of ten investors holding just one of those stocks would have made nothing.

This is why averages can sometimes create a misleading impression of what the typical investor experienced.

The historical evidence does not show that every IPO underperforms. Some newly listed businesses have generated substantial long-term wealth.

But it demonstrates how dangerous it is to confuse an impressive listing with an attractive long-term investment.

You don't own the average return of the IPO market. You own the shares you actually purchased, at the prices you actually paid.

08 — Why I Don't Chase Listing Gains

I am not completely opposed to IPO listing trades.

If I find an offering with sensible pricing, strong financials, credible management, and attractive probability-weighted returns, I see no reason to reject it merely because it is an IPO.

But I don't want IPO applications to become the centre of my investment process.

The most attractive IPOs can be heavily oversubscribed, leaving little probability of allotment. The weaker offerings can carry greater listing risk.

GMP expectations can change abruptly, and even after a successful listing, purchasing shares at an inflated valuation may produce disappointing long-term returns.

Now compare that with investing in an already-listed company.

I can study its annual reports, examine several quarters of earnings, evaluate management execution, compare valuations with competitors, and wait for a price that provides a reasonable margin of safety.

I can choose when to invest. I can decide how much capital to allocate. I can avoid the company if the valuation is unreasonable.

Most importantly, I don't need to win a lottery to purchase shares.

That doesn't make listed-equity investing easy. It simply gives me greater control over the decisions that matter.

And control over my investment process matters enormously to me.

09 — The Fear of Missing the Next Great IPO

Perhaps the strongest emotional force behind IPO investing is the fear of missing out.

What if this is the next extraordinary company? What if the stock doubles after listing? What if I never get another opportunity to buy it at this price?

But there is something investors frequently overlook.

A genuinely good business does not stop being a good business after its IPO.

It continues selling products, competing, reporting earnings, and making capital-allocation decisions.

Its management continues creating or destroying shareholder value. And its shares continue trading in the market.

Sometimes an excellent business becomes attractively valued months after its listing. Sometimes the opportunity comes years later.

Sometimes the market never offers the valuation I want.

I can live with that.

I would rather miss a great business than own it at a price that leaves little room for disappointment.

Because investing isn't about participating in every exciting story. It is about identifying opportunities where potential returns adequately compensate for the risks.

10 — The Final Thought

After examining ten years of IPO data, I don't believe the correct conclusion is that IPOs are universally bad investments.

The evidence doesn't support that.

Many IPOs deliver positive listing-day returns. Some newly listed companies create extraordinary long-term wealth.

But the data also reveal the limitations of treating IPOs as easy money.

Listing returns change dramatically across market cycles. Attractive issues can be difficult to obtain. A substantial portion of IPO fundraising can represent selling by existing shareholders.

Grey market premiums are unofficial and uncertain. And buying a popular business at an enthusiastic valuation can result in years of disappointing returns.

I don't see the need to compete for every new issue when thousands of already-listed businesses are available for research and investment.

If an IPO offers a genuinely attractive opportunity, I'll consider it.

If not, I'll move on.

I don't need to be present at the beginning of every company's public-market journey.

I need to be present when the relationship between business quality, valuation, and potential returns becomes attractive.

The stock market will always offer another opportunity. My responsibility is not to chase every one of them, but to recognise the few that deserve my capital.

And that is why, most of the time, I stay away from IPOs.

Research note: Listing and long-term performance statistics refer to specific historical IPO samples. The GMP and allotment examples are illustrative. Historical performance does not guarantee future outcomes. This essay represents a personal investment philosophy and is not investment advice.