‘Retail investors should study IPO prospectuses, business models, financial performance and valuations instead of relying on listing-day hype.’
Key Points
- ‘Investors should examine IPO size, business operations, financial performance, market potential and risk factors before making investment decisions.’
- ‘Offers for sale accounted for around 60 per cent of the more than Rs 1.5 trillion raised through IPOs this year.’
- ‘Financial investors exiting through IPOs may push valuations higher, leaving new investors exposed to potential wealth erosion.’
“A huge number of retail investors in the country trade purely in IPOs. We have had about 104 IPOs so far this year, already surpassing the 2025 tally, and we still have three months to go,” Deven Choksey, promoter and managing director of DRChoksey Finserv, said at a fireside chat at the Business Standard BFSI Insight Summit in Mumbai.
Why do investors apply for IPOs?
When I started my journey, I used to attend IPO meetings, interact with promoters, and understand the underlying strength of the business.
Back then, we had bulky draft red herring prospectuses and red herring prospectuses. Today’s generation of investors is extremely lucky, as these documents are readily available for them to study, but they no longer have the time to do so.
Those who invest in IPOs would definitely study these documents, but those who buy and sell IPOs as a profession may not want to study them. Instead, they may look at grey market premiums, and that is where I think they connect with the market.
A huge number of retail investors in the country trade purely in IPOs. We have had about 104 IPOs so far this year, already surpassing the 2025 tally, and we still have three months to go.
Between July and October, we have had a large number of IPOs, including two landmark issues.
Those who traded IPOs earned an average return of about 17 per cent, while investors in companies that raised less than Rs 1,000 crore earned average returns of 19-20 per cent.
Gains from larger companies have been relatively muted, while those from smaller companies have been higher.
The underlying assumption has been that the smaller the company, the greater its ability to benefit from limited liquidity.
That, I think, is where these investors have made their gains.
An IPO prospectus can run into hundreds of pages. If a do-it-yourself investor has just 20-30 minutes, which three sections should they read first, and what should they take away from each?
One way to approach a prospectus is to use artificial intelligence tools such as Claude or ChatGPT to get a quick overview of the document.
I think the most important aspect to examine is the size of the IPO. The second is the company’s business model and the nature of its operations.
The third is its financial performance and how the company has fared financially.
Investors may also want to examine the risk factors, as these generally flag areas that warrant caution.
These are a few aspects on which investors should definitely apply their minds.
They should also study the details in the prospectus that outline the potential size of the market and explain the type of company or business they are investing in.
The rest of the information in an IPO prospectus is complementary, in my view. If investors examine these details, they can move a step closer to understanding the business and deciding whether to apply for the IPO.
Today, investors can upload an IPO prospectus to tools such as NotebookLM and ask questions. Instead of simply asking, “Should I apply for this IPO?”, what are five useful questions they should ask AI to understand the business, financials, valuation, and risks?
I am a firm believer that AI works best when humans interact with it. I think the best results come when human intelligence works alongside AI. Interaction is meaningful.
AI and technology can speed up the process and help filter information, but one should know what to ask. That comes from greater inquisitiveness, intuition, and reading on the subject.
When a company comes to the market, investors need to understand its business.
If they have already read about the company and understood its business case before interacting with AI, they are more likely to get better answers.
Understanding a company’s business is fundamentally important, in my view. AI offers the advantage of processing information faster, but investors also need to engage with the subject matter themselves.
How important is understanding where IPO proceeds will go?
How should investors interpret an offer for sale (OFS) compared with a fresh issue, and what should they look for when promoters are selling shares?
Of the 104 IPOs, about 32 companies included an offer for sale this year.
The total amount raised through IPOs, including fresh issues and OFS, was more than Rs 1.5 trillion. Around 60 per cent of this amount came through offers for sale.
An offer for sale can be divided into two categories: The monetisation of a promoter’s stake and the sale of shares by financial investors who entered the company at the private equity stage and funded it through successive rounds of investment.
Financial investors typically seek to exit at the IPO stage. You will find that, when financial investors exit, valuations are often stretched to the highest levels, allowing them to monetise their investments.
This means that new investors may end up buying shares at an expensive valuation.
Over the past five years, proceeds from OFS by just four or five companies have totalled about Rs 95,000 crore to Rs 1 trillion.
New investors should be extremely cautious about the valuations they pay, given the considerable erosion of wealth that can follow for those entering at elevated prices.
Unfortunately, a great deal of hype is generated during this process, creating a fear of missing out (FOMO) among ordinary investors.
They fear missing out on a particular business and may end up paying a premium for it.
In some cases, promoters themselves exit. We have seen a couple of South Korean companies whose owners exited, with at least one of these companies generating very large returns. It operates in the consumer goods business.
Promoters monetising their stakes is not necessarily a bad thing. However, when financial investors monetise their stakes at such a stage, valuations can become stretched.
How much do company fundamentals influence listing-day returns compared with market sentiment, demand, and liquidity? Can investors realistically predict listing gains by analysing the prospectus?
There is no general answer; the outcome can vary from company to company. Today’s mega listing, Jio Platforms, has surpassed its existing competitor, Bharti Airtel, in terms of market capitalisation.
In my view, every company that comes to the market has a unique selling proposition in terms of its business model.
Investors need to examine that proposition and decide what they actually want to invest in.
They should also look at the company’s future prospects rather than focus solely on its present position.
Is global investment in IPOs currently feasible for a retail investor? Are the technologies and platforms available to do that?
Of course, it is possible. I think the Indian government allows remittances of up to $250,000 per individual per year under the Liberalised Remittance Scheme.
Several products are available in global markets through established platforms, including exchange-traded funds (ETFs) that invest in global companies and IPOs.
Individual investors operating within the $250,000 limit may not be able to make meaningful investments in large IPOs directly, in my view.
ETFs that pool money from investors could potentially invest in some of these larger companies.
For example, one of the most successful IPOs in recent months was SpaceX.
Investors who wanted exposure to the company would not necessarily have been able to invest directly.
At the same time, the number of times the IPO was oversubscribed would probably have reduced their chances of securing meaningful allotments.
In such a situation, investors could gain exposure through ETFs, which can place larger bids and may have a better chance of securing allotments.
In terms of investment size, individuals can buy smaller lots, such as 10 units of an ETF, which could provide exposure to a basket of four or five IPOs.
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Feature Presentation: Aslam Hunani/Rediff
