IPO Investing for the Retail Investor – Look Before You Invest!
Abstract
IPO markets have witnessed historic retail participation in the past few years. However, the market has hit a pause button now owing to geopolitical uncertainty brought by Iran war. In April 2026, India’s capital markets regulator, SEBI has provided one-time relaxation to IPO timelines. This article examines why an IPO is such an important event in the lifecycle of a company. We look at what an IPO is and the reasons why companies go public. Further, this article provides pointers that a retail investor can look into before deciding to invest their hard-earned money in IPOs.
Introduction
Indian capital markets witnessed a boom in FY2025 and FY2026. However, for investors seeking to profit by selling their shares immediately on listing, it was a mixed bag. Of the nearly 100 Mainboard IPOs (non-SME) that hit the market in 2025, nearly half posted listing day gains, while the other half posted listing day losses. Table 1 presents the listing gain and price data of top ten Mainboard IPOs based on issue size. As per Chittorgarh.com, very few IPOs listed in the last quarter of FY 2026 had listing day gains. The IPO market is sluggish now given the geopolitical uncertainty brought about by the Iran war. India’s capital market regulator, SEBI, has recently provided a one-time relaxation regarding IPO timelines.
Before we look at why SEBI has offered a one-time relaxation, let us first examine why an IPO is so important in the lifecycle of a company. We seek to answer the following questions: What is an Initial Public Offering (IPO)? How is it different from an Offer for Sale (OFS)? What should a retail investor do when there is a market hype? Go ahead and put in their hard-earned money? Exit immediately after listing, pocketing whatever gains one can get? Is the price of the share reflective of the true value of the share? What is market timing? Why has SEBI allowed relaxation in timelines? Let us examine each of these ideas in turn.
A Brief Overview of the IPO Universe
An Initial Public Offer refers to the first sale of shares of a company. It enables the company to raise funds for various purposes like financing new projects, reducing debt burden, funding acquisitions etc. Unlike taking on debt, where the company is liable to pay the investor both principal and interest, a share represents fractional ownership of the company. Sometimes existing investors in the company sell off their stake fully or partially, which is referred to as Offer for Sale (OFS). Public Offerings, initial and follow-on, raise capital for the company and provide a forum for early-stage investors to realise huge listing gains.
From an investor’s point of view, if the company goes on to do well, the investor benefits. This could be in the form of increased dividends or greater capital appreciation. If, however, the share price starts to dip, the investor may lose their entire investment. The rewards of share market investing are huge, but so are the risks.
Why is the IPO important for the Company?
For a company, going for an IPO is a massive process often taking many years. One reason why companies delay the same is the significant legal and compliance costs associated with listing on stock exchanges. Registration, regulatory fees, underwriting costs, brokerage fees, fees paid to lawyers and other professionals, marketing fees etc., make going for an IPO an expensive affair. Once the company is listed on the stock exchange, continued compliance costs and listing requirements add a cost burden.
Another reason is the quarterly scrutiny of results that companies will be subjected to. Research has shown that CEOs and top management of companies succumb to meeting the quarterly earnings estimates and end up making sub-optimal decisions. Investor expectations cause them to favour short-termism, when they should be ensuring long-term growth of the company. Sometimes this leads to window-dressing and frauds, thus undermining the existence and viability of the firm. It is pertinent in this context to note that US President Mr. Donald Trump in September 2025 had floated the idea that companies should be allowed to post half-yearly earnings numbers as against quarterly reporting.
A third reason for not listing is the availability of private credit. If companies have access to large capital without the tedious legal and compliance requirements demanded by listing, they will opt to remain privately held.
IPOs in India can be mainboard IPOs which are typically large well-established companies raising higher amounts of capital. Or these can be IPOs of Small and Medium Enterprises (SMEs) which face lower entry barriers to listing and have smaller issue sizes.
Being a Minority Investor in India
India is an emerging market, with lower per-capita income as compared to advanced economies like the US. In such markets, research has documented that legal enforcement is typically weaker. The possibility of the small investor being taken advantage of cannot be ruled out. Especially in boom periods, when new IPOs are welcomed with aplomb. Companies without strong fundamentals may choose to list to take advantage of the hype.
Companies seek to time their issues around periods of positive market sentiment in what is called “Market Timing”. This ensures they fetch the targeted amount with a lower stake sale. Further, even a relatively weaker, loss-making company, can garner public interest and ensure purchase of its shares. Such companies may not do well. In addition to losing money, investors would face opportunity cost of funds, as they could not put in that money elsewhere.
Our legal framework and enforcement mechanisms have grown from nascent stages but needs to evolve further. Post revamping of the Companies Act in 2013, under Section 245, shareholders or depositors holding at least 2% of a company’s shares can launch a class action lawsuit against frauds, or unfair practices by promoters. Under this, an investor can claim for damages on behalf of all those affected. Companies would not be able to make false promises or tall claims about their products or services without serious repercussions. In India, the first class-action lawsuit has been filed against Jindal Poly Films against promoters for alleged siphoning of assets of more than Rs.25,000 crore in October 2025. But there is a long way to go. It would be sometime before such legal protection mechanisms become truly operational in India.
SEBI Guidelines and safeguards
In a significant development, Securities and Exchange Board of India (SEBI), on October 31, 2025, amended the Issue of Capital and Disclosure Requirements (ICDR), 2018. As per this amendment, the total reservation for Anchor investors in IPOs was increased to 40% from 33%, effective November 30, 2025. Of this 40%, 33% is for mutual funds and 7% for insurers and pension funds. If the 7% is unsubscribed, it will be re-allocated to mutual funds. Another change that has been brought about is an increase in the number of anchor allottees up to Rs.250 crore, where the minimum is retained at 5 but the maximum is increased to 15 (from 10).
One may ask- but how does increase in anchor investor portion benefit the small investor? It will because this framework broadens the participation of anchor investors in IPOs. Anchor investors are sophisticated institutional investors who can conduct detailed research on the IPO firm. They generally invest with a long-term focus. These ‘block investors’ tend to commit large sums of money before the issue opens for public subscription. Such large investments lead to greater stability in IPO pricing, improved market stability and greater oversight. This further leads to steadier post-listing performance by the company, positively impacting share prices.
In times of IPO booms, more retail investors participate. SEBI has defined a retail individual investor as those investing less than or equal to ₹2 lakhs in an IPO. This upper limit ostensibly protects the small investor from losing too much. It is notable that one of the revered investors of all time, Warren Buffet has been known to stay away from IPOs. He has invested in only two IPOs, either by himself or through his firm, Berkshire Hathaway. The first was an investment in Ford Motors in 1956 and the second in digital storage firm Snowflake in 2020.
In case of market downturns, anticipating a lower valuation, companies may choose to wait it out. Additionally, investor appetite for new issues may be weak. Generally, when SEBI grants IPO approvals through its observation letters, these have specific validity of 12 months (confidential IPOs have 18 months). Within this period the IPO must happen. SEBI has, in April 2026, offered a one-time validity extension to observation letters set to expire between April 1- September 30, till September 30, 2026. This helps the companies have some time before their IPO without rushing to list or having to start the process afresh. Companies need to still confirm, though, through their lead managers, compliance with SEBI ICDR when they submit updated offer documents.
How to invest then?
Good investments have their base in a few sound principles. The first of these is the classic maxim for good investment – “buy low, sell high”. This means buy at a lower price and sell at higher price. In boom periods, this principle is at risk. Share price could get inflated due to investor expectations. However, only the promoters or insiders of the company know its true financial position. Though mandatory IPO documents strive to mitigate this information asymmetry, a retail investor may not be able to ascertain the true situation. If she ends up buying shares at exorbitant prices, the value of the investment would be lost.
Another is the investment horizon. As a retail investor, are you investing to take advantage of listing gains? Or are you looking to get in early and remain invested in the firm? This involves a gamble because many shares plummet on listing, some subsequently recover, some don’t. For example, at the time of this writing, shares of FirstCry, Ola Electric and WeWork India are trading much below their listing price. Lenskart Solutions, the eye-wear maker, recorded a listing day loss of 1.74%, but its share price is up as at the time of this writing. Ather Energy which had a listing day gain of just 2.18%, is trading at nearly double its listing share price. It may not be possible for the retail investor to ‘make a killing’, if the share prices plummet on listing day. A high grey market premium pre-listing does not guarantee that companies will do well later. Ideally a retail investor may invest only if it aligns with their personal goals and motivations at the time. They should be investing only such sums as they are comfortable losing.
A third aspect is to learn as much about the company as possible. Several questions need to be asked before investing in an IPO. Like, what is the revenue generating model adopted by the business, and does that provide a lasting competitive edge? How is the company placed vis-a-vis its peers? Are there any key features allowing the company to expand its operations (grow in scale) or command a premium in pricing its product (growth in revenue)? Can it sustain the rosy picture being presented? For example, Go Fashion, the parent company of Go Colors! had listed at a 90% premium to its offer price, and the issue was oversubscribed 135 times in November 2021. Four years later the company’s shares were going down by nearly 60%. The company had adopted a strategy of focusing only on leggings/bottom-wear, which paid off well initially, but has started to wear out.
Further, careful scrutiny of financial statements is necessary. Just because the prior-year profit is higher, does not mean that the firm has started doing well. Companies may undertake actual restructuring to boost income. Or they may be utilising one-time items and accounting effects to present a cleaner picture closer to listing. The true motive of undertaking such an exercise will be revealed only upon closer examination.
A fifth aspect is looking at the top management of the company. Is the management qualified and knowledgeable in its chosen domain? What is their take on the company? For example, in letters to shareholders over the years, Amazon founder Jeff Bezos has continued to mention the idea of Amazon being ‘long-term’. This communication clearly set the tone for how the company came to be perceived. It pays to notice if the existing investors are selling off their entire stake. Are there indications to show that the promoters do not believe in the growth story they are propounding?
Conclusion
While it would not be possible for anyone to accurately predict a company’s trajectory by examining its past, it would be helpful to understand what the company stands for. Investing in IPOs should not be based on hearsay or a mouth-watering grey market premium. Mere speculation and a positive customer sentiment should not drive decision making. A balanced evaluation of the company, its business model and growth plans should be pre-requisites to any investing decision. Consistent investment, especially through mechanisms like Systematic Investment Plans or SIPs, and understanding the impact of compounding can aid long-term wealth creation. One must invest strategically in IPOs, for getting some early lower-priced shares of the next TCS or Infosys could be game changing!
Authored by:
Dr. Suja Sekhar C
Manager (Research)
SBSC Hyderabad
