Should You Invest in IPOs? An Honest Framework for Indian Investors

There is an easy version of this question and a hard one. The easy version is whether you should apply to IPOs as a category, hoping for listing gains, on the strength of subscription figures and an unofficial premium. That is not investing, and the answer is no. The hard version is whether a specific business coming to market at a specific price is worth owning — and that has to be answered one company at a time, with work.

This guide sets out a framework for doing that work honestly: why the odds are structurally tilted, what the historical base rates look like, what to read in the offer document and in what order, the red flags, and the underrated option of passing and buying later. It recommends nothing — AIVITTA is an analytics platform and this is education, not a view on any issue.

Start with who is on the other side of the trade

In the secondary market you buy from a stranger with their own reasons and no special information. An IPO is not that situation. The people selling — the company, its founders, its early institutional backers — know the business better than any outsider can, and they have chosen both the moment and the price range.

Nobody brings a company to market during weak sentiment and depressed valuations if they can help it. Offerings cluster in favourable windows, and the price band is set by the issuer with its bankers, informed by pre-marketing and anchor demand. That band is a considered seller's price. It may still be a reasonable buyer's price — sellers do not always get the better of it, and a company that prices too aggressively pays for it later — but begin from the assumption that the pricing has been optimised in a direction other than yours, and require the numbers to overcome that. This is not cynicism; it is the discipline you would apply to any transaction where the counterparty knows more and picked the timing.

The base rates, stated fairly

Two patterns in the evidence are stable enough across decades and countries to build into your expectations. Both matter, and they point in opposite directions.

The first is listing-day underpricing. On average, IPOs list above their issue price — one of the most consistently documented phenomena in finance, and why the perception that IPOs are free money persists. It is also much of what a grey market premium appears to predict: the base rate would have been positive anyway.

The second is long-run underperformance. Averaged over meaningful holding periods after listing, newly public companies have historically delivered weaker returns than the broader market. The averages hide enormous dispersion — some newly listed companies compound magnificently — but the central tendency is the opposite of the listing-day pattern. The excitement is front-loaded; the disappointment arrives once a few quarters of results have been reported as a listed company.

Why listing-gain hunting is not investing

There is nothing shameful about trading a short-dated event. But name it for what it is: the two activities need different disciplines and get confused constantly.

Listing-gain hunting has the structure of a trade: a defined entry, a defined exit on or near listing day, an outcome driven by sentiment and flow rather than fundamentals. Run properly it needs a pre-committed exit rule, sizing that survives a bad listing, and an honest tally across many applications rather than a memory of the good ones. Most people applying for listing gains have none of these.

Investing has a different structure: you form a view on a business and a price, accept that the market may disagree for a long time, and exit when the thesis breaks or the valuation becomes absurd — not on a date. The IPO is then merely how you acquired the shares, and possibly not the best way. So write down, before you apply, which activity you are engaged in and what would make you sell. If you cannot complete that sentence, the answer is already available.

What to read in the offer document, in order

The DRHP or RHP is long, and you need not read all of it. Six sections carry most of the signal, and a determined reader gets through them in under an hour.

1. Objects of the issueWhat the money is for: capacity, debt repayment, working capital, acquisitions, or general corporate purposes. A large unspecified allocation, or proceeds earmarked to repay related-party borrowings, tells you something about the purpose of the offering.
2. The fresh issue versus OFS splitHow much of the money reaches the company at all. Offer-for-sale proceeds go to existing shareholders, not into the business — a predominantly OFS issue means you are funding an exit, not a business plan.
3. Who is selling, and how muchFounders taking partial liquidity after years is normal. A promoter or recent pre-IPO investor selling a large share of their holding at the top of a favourable window is a different fact, and deserves weight.
4. The financial historyThree or more years of restated financials. Read the shape of the trend, not the latest number: is growth accelerating or decelerating, are margins stable, does operating cash flow track reported profit, and is the most recent year an outlier the pricing is leaning on?
5. Risk factors and litigationThe most candid section, because it is drafted defensively. Skim the boilerplate and find what is specific: revenue concentrated in a few customers, dependence on one product or geography, regulatory exposure, material litigation, and related-party transactions moving money around the promoter group.
6. The basis for issue price and peer comparisonThe valuation multiples implied by the price band, alongside the same multiples for comparable listed companies. This is the single most useful page. A substantial premium to listed peers means the document is asking you to accept a growth or quality argument — find it and decide whether you believe it.

Red flags worth taking seriously

None is disqualifying alone. Several together, in a business you do not deeply understand, is reason to pass.

• Almost entirely offer for sale, with little or no fresh capital entering the company.
• Proceeds used to repay promoter or related-party loans — public money routed toward insiders.
• A large 'general corporate purposes' allocation — money raised without a stated use.
• Valuation well above listed peers with no reason beyond growth not yet demonstrated as a listed company.
• Revenue concentration in one or two customers, one product line or a single geography.
• Operating cash flow persistently diverging from reported profit over several years.
• A restructuring or valuation step-up shortly before the filing that flatters the numbers presented.
• A single unusually strong recent year doing the heavy lifting for the pricing.
• Your only reason for interest is subscription figures or an unofficial premium — see why GMP misleads.

The underrated option: pass, and buy later

IPO applications create an artificial sense of deadline. The window is a few days, subscription figures tick up in public, and the whole apparatus is designed to make not participating feel like a loss. It almost never is.

If you like a business, you can buy it on the exchange after listing — and waiting buys real advantages. You will have seen a quarter or two of results reported under listed-company disclosure. You can buy the exact quantity you want rather than accepting a lottery outcome. You can see actual liquidity and an actual market price rather than a negotiated band. And you will be past the period when sentiment, thin free float and lock-in schedules dominate price formation. What you give up is the listing pop — and if that was not the reason you wanted to own the business, you have given up nothing that matters.

Sizing, and where an allotment fits

A retail allotment is small by construction, which limits the damage of a bad one. But watch the habit that forms around applications: a stream of small positions in newly listed companies, each acquired for reasons unrelated to the business, accumulating into a long tail nobody tracks. That is not a portfolio; it is a collection of souvenirs from application seasons.

Treat any allotment as a position like any other. Does it fit your sector exposure and concentration? Does it change your portfolio risk in a way you accepted? Would you buy more at today's market price — and if not, why are you holding it? If the honest answer is that you are waiting to get back to the issue price, you are managing your ego, not your money. Keep the alternative in view too: for most investors the bulk of equity exposure sensibly sits in low-cost diversified holdings, with individual convictions in a contained slice — see index funds versus direct stocks. An IPO application should have to compete with that for the same rupee.

So: should you?

Apply if — and only if — you have read the offer document, you understand what the business does and how it makes money, you find the price defensible against listed peers, you know what would make you sell, and you would be content to hold for years if the listing were flat. Some issues meet that list. Most do not, and a given investor will find far fewer that do than the application calendar implies.

Pass whenever you cannot complete it. Passing costs you nothing but a possibility, and the company remains available afterwards on better informational terms. The investors who do well out of public issues over a decade are not the ones who applied to everything; they applied rarely and knew why. AIVITTA is an analytics and education platform, not an investment advisor — we do not recommend any IPO, and the decision is entirely yours.