The hidden Indian IPO market crisis and its economic impacts

India's IPO scene, long hailed as a barometer of healthy capital markets and entrepreneurial fervor, now bears the markings of structural wear. A silent crisis is brewing, with good companies delaying their listings amid valuation mismatches and governance anomalies discouraging investors-economic aspects that raise urgent questions for India at large.

The story behind the headlines

India's IPO market had been, until recently, considered a dynamic conduit for wealth creation, democratised access to capital, and entrepreneurial prosperity. Large-ticket listings like Zomato, Nykaa, and Paytm generated both media hype and investors' mania.

While there are robust macroeconomic factors at play, with a GDP growth rate of around 7.6% (Q3 FY24, MOSPI) and improving retail investor interest, the number of high-quality, large IPOs did not quite keep pace. What's truly going on behind the scenes?

A crisis of confidence, not just capital

The issue is not a lack of startups or market appetite; it is a crisis of trust. It is keeping back many potential startups from coming public not because they aren't operationally ready, but because they want to avoid erosion of value after listing.

The Paytm and CarTrade IPOs are cautionary examples; both were significantly marked down after listing. Retail investors becoming so volatile in their response means enthusiasm turning to scepticism. This becomes a vicious circle—good companies keep backpedaling on listings, which makes the overall quality of the IPOs go down, further deterring investors.

More than 60% of IPOs listed during 2021–2023 are trading below their issue price, which has precipitated risk aversion, especially from domestic institutional investors who now prefer proven dividend-paying stocks rather than growth-stage technology businesses with prolonged gestation cycles according to Kotak Institutional Equities report in 2024).

Governance and transparency issues

Another silent chokepoint is the regulatory framework of companies going for IPOs. The heightened scrutiny by SEBI on disclosures, particularly by companies that have not yet made profits, has strengthened the process. That being said, the sudden tightening of rules has instilled a sense of fear. A number of unicorns that had multi-billion-dollar valuations earlier are now finding it difficult to prove their unit economics, forget about quarterly earnings estimates.

There is also a disconnect between Indian promoter aspirations and global best practices. IPOs tend to be considered by founders as a liquidity event, whereas public market investors anticipate predictability, governance, and transparency. This intent mismatch has created reluctance among many institutional players to put up capital at the IPO level.

Valuation expectations are out of sync

Startups inured to private capital from international VCs and PEs—usually at overvalued prices—find themselves abruptly brought back to reality in the public markets where cash flow, not merely stories of growth, commands respect. Public markets insist on accountability and discipline in pricing, but these are tendencies still in gestation in India's startup ecosystem.

This amount of pressure was seen in the instances of Oyo and PharmEasy, both of which postponed their IPOs even after filing DRHPs. As per media reports, PharmEasy was forced to accept a 90% valuation reduction in its pre-IPO round, which rendered it virtually impossible to bring investor aspirations in harmony with market reality.

Broader economic implications

Why should it matter to the Indian economy? To begin with, IPOs are essential for capital formation. When good startups do not list, it limits the availability of patient, long-term retail capital and traps wealth creation in the VC/PE system. This further entrenches the disparity among institutional and retail participants.

Second, the IPO slowdown impacts employment generation. Public firms are more likely to be the focus of analysts, media, and big clients, drivers of business and recruitment. Slowing here postpones the chain reaction of economic growth.

Third, a duller IPO market deters global capital flows. Global investors are deterred when they observe weak aftermarket performance and valuation discrepancies. They do not invest in India-themed funds. FDI and FPI flows turn guarded, impacting India's reputation as a hub of capital markets.

A way forward: Reset, not retreat

India need not stall the IPO process—it must reset it. The following are some pragmatic solutions:

•         Reform DRHP guidelines: Make them more story-based for new-generation companies without losing rigour.

•         Implement post-IPO handholding mechanisms: Handhold startups in managing investor expectations and compliance.

•         Develop alternate listing platforms: As with the SME Exchange, for growth-stage tech firms to dip their toes in with smaller listings.

•         Investor education: Institutional and retail investors both need to keep with the new equity stories of digital-first and purpose businesses.

Final thoughts

India's IPO slowdown is not a meltdown; it is an overdue reckoning. The market is developing, and along with development comes the pains of growth. If we can close the trust deficit between public investors and promoters, bring valuation expectations in line, and overhaul listing procedures, the next wave of IPOs may be more stable, transparent, and profitable for everyone.

This stealth crisis can well become the basis for a more robust Indian capital market—if we decide to view it not only as a setback, but as a staging ground for sustainable financial innovation.

Appalla Saikiran, Founder & CEO, SCOPE