Diminishing Promoter Ownership of Companies- No ‘Skin in the Game’?

April 11, 2026April 11, 2026 admin 0 Comments accountability, business strategy, corporate governance, India companies, investors, promoter ownership, Risk management

Abstract

Companies raise capital through Offer For Sale (OFS) component, allowing existing investors to sell their shares or exit the company. The positive aspect of an OFS is that it allows initial investors to gain from their hard work when the company was in the nascent stage. The negative aspect of an OFS is that it permits equity dilution. The article delves deeper with relevant examples and advises caution while investing in OFS.

Introduction

The current year has witnessed an unprecedented wave in equity capital markets. As of early December 2025, India’s IPOs have already gathered Rs. 1.77 trillion as against the 2024 high of Rs. 1.73 trillion. Retail investors have flocked to the market in large numbers. Companies, some even loss making, have managed to raise huge amounts of capital via Initial Public Offerings(IPOs). Many of these listings have an additional Offer For Sale (OFS) component. An OFS refers to the portion of the company being sold by the management and promoters. The funds so raised do not get invested in the company, instead, it goes to the promoters or firms selling their shares or in other words, cashing out. As per a Moneycontrol Report in November 2025, between 2021 and 2025, while Indian companies raised Rs. 5.4 trillion via public issues,Rs. 3.37 trillion went into funding OFS exits.

What is OFS?

The decision to list is an important milestone in the life of a company. By selling its shares, it allows outsiders (retail and institutional investors) to start owning a piece of the company. By building public shareholding, the company gains the currency for acquisitions, the cash to settle debt or take on new projects. In some instances, early-stage investors like Private Equity(PE) or Venture Capital (VC) firms exit the firm during the IPO. While an IPO is the first sale of shares to the public, an OFS can be undertaken only with existing shares. Only promoters or shareholders holding more than 10% of share capital can sell shares in an OFS. An IPO brings cash into the company, while OFS brings cash to existing investors. Share-sale by existing investors merits attention as it could signal important things. Questions like the following, come up and need to be answered.- Why are these shares being sold? Is it because the promoters don’t believe in their company’s growth story? Are the financials of the company okay?

The two-sides of the OFS coin

While examining OFS, therefore, two opposing aspects need to be kept in mind- one positive and another negative. The positive aspect stems from the following reasons. The first reason is that promoters are well within their rights to sell a portion of their ownership should they wish to do so. They have built the company from the ground up. They have believed in an idea and brought it into existence. They have gone through gruelling days, punishing work schedules and possibly their life savings. They have convinced marquee investors to place a bet on their firm. So when the ability to sell a portion of the company and benefit from the higher valuations arrives, they should be permitted to avail it.

The second reason is that it provides the motivation and encouragement to others to pursue bold new ideas. It supports innovation and builds faith for other entrepreneurs. The third reason is that PE/VC firms invest in such early-stage companies with the hope of finding the next exceptional firm. When the company gets an excellent valuation subsequently, it justifies the risky bet made. Out of the 20 or so firms that receive early investment, very few manage to succeed. An OFS is the mode using which PE/VC investors exit the successful company. The capital growth achieved is used to re-invest in other new ventures, and the cycle goes on. It is the possibility of large gain from share sale of such companies that encourages PE/VC investment. The fourth reason is that share-sale by existing investors may take place to comply with regulations such as maintaining a minimum public shareholding of 25%. If the promoter’s shareholding in the listed company exceeds 75%, they may use the OFS route to bring it within the prescribed limit.

However, the negative aspects are important too. The first reason is that it defies basic corporate finance theory. The pecking order theory in corporate finance informs us on how a company raises the capital it needs. It would depend on its internal resources or retained earnings first, followed by debt and lastly by selling equity. Equity has high cost of capital and has higher transaction costs as compared to other forms of financing. Selling shares is the last resort as this means giving away share ownership. So when a firm resorts to selling its shares for raising cash it raises the question as to its inability to raise debt. That the promoters wants to reduce their stake in the company raises questions about its long-term viability.

The second reason is that as per Corporate Finance Theory, debt is deemed to be a disciplining device. The regular repayments of principal and interest weigh heavily on the minds of promoters and the management. The consequences of default and possible bankruptcy are thought about, as these might lead to dire straits including loss of control over the company. Thus, debt prevents them from spending cash on luxuries like high-end travel, private jets, or 5-star stay for executives. It prevents them from making immediate acquisitions, based on implied synergies which may not materialise. It forces them to evaluate their investment decisions carefully and not waste resources on frivolous spending.

The third reason is that companies may raise equity to take advantage of the higher valuations in the market, a phenomenon called ‘market timing’. When market sentiment is positive, share prices tend to keep moving up and this becomes an excellent time for companies to raise funds. It is observed that when companies in particular industries manage to raise cash through equity issues other companies in the same or related industries tend to follow suit. When companies that raised substantial amount of funds in IPO, choose to go for OFS again within an year or two, it raises questions. Did the promoters keep the IPO size low, despite need for more funds, hoping to sell at higher price subsequently? Were they betting on increased investor appetite to push prices up? Or did they underestimate how hard the competition would be, and subsequently realised they needed more money to keep going? Or did they wish to ensure that the IPO is oversubscribed and successful, by keeping its size low? Only insiders in the company may have the answers to these questions.

Why should we be wary of OFS?

Consider the situation when companies that were loss making and continue to be so, raise funds subsequent to IPO and dilute equity. For example, online food and grocery delivery service Swiggy had gone for an IPO of Rs. 11,327 crore and an OFS of Rs. 6,828 crore in November 2024. The firm has now raised Rs. 10,000 crore via a Qualified Institutional Placement(QIP) in December 2025. This QIP was subscribed by domestic institutional investors including mutual funds, which in turn pool a lot of retail investor money. The fresh capital would take Swiggy’s cash balance to about Rs. 15,000 crore. The funds are expected to help the firm position its grocery delivery platform, Instamart, better amidst the battle amongst online platforms like Blinkit, Eternal(formerly Zomato) and Zepto. As per the firm’s report, ‘How India Swiggy’d 2025’ users ordered 93 million biryanis (an average of 194 orders every minute). ‘How India Instamarted 2025’ report notes that the largest single cart was worth Rs. 4.3 lakh, from Hyderabad and there were gold purchases worth Rs. 15.16 lakh in Mumbai. While improvement in user quality and retention rates and launch of “Quick India Movement” have stepped up sales, lowered subscription fee and reduced minimum order values have pulled down revenues.

As per Dion Global Solutions Ltd., Swiggy’s net cash flow from operating activities as of March 31, 2025 is negative to the extent of Rs. 2169.47 crores (-Rs. 2169.47cr), and it has remained in the red since March 2022. The firm’s founder-directors hold low stakes in the company and as of late December 2025, CEO and co-founder Shriharsha Majety owns less than 5% of the company. A similar shareholder percentage is seen for Eternal, where CEO and Co-founder Deepinder Goyal has a stake of less than 4%. Eternal raised Rs. 9375 crores via IPO and sold Rs. 375 crore worth of shares in OFS in July 2021, and in November 2024, raised Rs. 8500 crores through QIP.

However, another startup, FSN Commerce Ventures Ltd. under the brand name “Nykaa’ has a promoter shareholding of 52.16%. Its net cash flow from operating activities was Rs. 142.58 crores and its debt was Rs. 1320.6 crores. The beauty and personal care products have a high markup owing to their perceived value and brand positioning. It may be argued that this lets them protect their margins better, leading to improved revenues as compared to other startups. But the fact that the original promoters retain a major stake and have not given into equity dilution, is likely to provide the retail investor with some comfort.

Conclusion

Therefore, for the retail investor buying shares via OFS is a balancing game and needs closer scrutiny. A bit of deep-dive into why the company is doing so might help identify some red flags. Prudent investment is about taking calculated risks. It should not be about absorbing the stake offloaded by promoter shareholders, because they perceive the company’s prospects going bleak.