IPOs increasingly becoming exit vehicles for early investors: CEA

Chief Economic Advisor V Anantha Nageswaran voiced concern that IPOs are increasingly serving as exit routes for early investors, diluting the purpose of public markets and long-term capital raising

India's Chief Economic Advisor V Anantha Nageswaran on Monday said he was concerned that initial public offerings (IPOs) are becoming an exit vehicle for early investors despite a boom in share sales.

 

Nageswaran made these remarks at the CII Financing Summit, noting that the trend was undermining the purpose of public markets. He added that India’s capital markets should evolve “not just in scale, but in purpose” as well.

 

"India's equity markets have grown impressively, but Initial Public Offerings (IPOs) have increasingly become exit vehicles for early investors, rather than mechanisms for raising long-term capital. This undermines the spirit of public markets," he added.

 

CEA cautions against 'celebrating wrong milestones'

 

The CEA cautioned against “celebrating the wrong milestones” such as market capitalisation or the scale of derivatives trading, saying these do not represent “financial sophistication”. Focusing on such metrics, he said, risks diverting domestic savings away from productive investment.

 

Nageswaran also noted that India’s sophisticated capital markets may have inadvertently encouraged “short-run earnings management optics”, driven by the link between such practices, management compensation and market capitalisation.

 

What do IPO trends show this year?

 

According to a PTI report, 55 Indian companies launched IPOs in the April-September period and raised nearly ?65,000 crore. Most were offer-for-sale (OFS) issues by existing investors, with only a small portion comprising fresh share issuances that benefit the company directly.

 

Why does Nageswaran want deeper bond-market development?

 

The CEA said India cannot rely solely on bank credit for long-horizon financing. He described the development of a deep bond market as a “strategic necessity” for meeting long-term objectives.

 

The academic-turned-policymaker, who recently returned from a visit to the US, said the Indian private sector has found “enough reasons” to remain cautious, avoiding investment decisions that could convert the country’s “strategic constraints” into opportunities.

 

India’s long-term strategic goals

 

“There is a need for ambition, a need for risk-taking and long-term investment. Otherwise, as India has seen this year, we risk falling short on strategic resilience, let alone building the strategic indispensability we aspire to as one of the world’s major players in the years ahead,” Nageswaran said.

 

The CEA also underlined the importance of building strategic leverage in line with the economy’s growing size over the next decade.