Initial Public Offerings

Imagine your neighbour has been running a small sweet shop for years. Only he owns it. One day he decides he wants a big pile of cash - maybe to open more shops, maybe just to take some money off the table for himself. So he does something new: he cuts the shop into ten thousand tiny slices and offers those slices for sale to the whole street. Anyone can buy a slice and become a part-owner. This is the very first time outsiders are allowed in, and there's a lot of noise and excitement about it because it's never happened before.

That, in plain words, is an Initial Public Offering - an IPO. A company that was privately owned by a few people (the founders, some early backers, maybe a fund or two) sells shares to the general public for the first time. After the IPO, ordinary people like you can own a piece of it, and the shares start trading on the stock exchange.

Now here's the one thing about an IPO that most people never stop to notice, and it's the thing this whole chapter is built around. An IPO is a sale. And in a sale, there is a seller and a buyer - and they want opposite things. When you sell your old bicycle, you want the highest price you can get. The person buying it wants the lowest. You are not on the same team. An IPO is exactly this, except the seller is a company's owners and their expensive advisers, and the buyer is you. Once you truly see that the whole event is designed by the seller, for the seller, almost everything else about IPOs starts to make sense - including why so many of them turn out to be bad deals for the person who buys.

Before we get into who does what, let's name the feeling, because the feeling is the whole trap. IPOs come wrapped in a very particular kind of excitement, and if you can feel it clearly you can start to defend yourself against it.

The feeling is fear of missing out. You see a new company all over the news. Friends are applying for its shares. Someone says it's going to "double on listing day." A number floats around that says people are already willing to pay much more than the offer price. And a small, hot voice inside you says: everyone is getting rich except me, and if I don't act right now, the train leaves without me forever.

That voice is not wisdom. It's the same feeling that makes a child grab the biggest slice of cake before anyone else can - fast, greedy, and not thinking. It doesn't ask, "Is this a good business at a fair price?" It only asks, "Will I feel stupid tomorrow if I don't get in today?" And notice something sneaky: this feeling is manufactured on purpose. The people selling the shares want you to feel it, because a buyer in a hurry, a buyer who is scared of missing out, is a buyer who doesn't check the price carefully. A calm buyer haggles. A panicked buyer just pays. The whole show - the television faces, the countdown, the talk of "grey market premium" - is tuned to switch off your careful, price-checking brain and switch on your grabbing, don't-miss-out brain. The first act of an investor is to notice the feeling and slow down, because the feeling is working for the seller, not for you.

Here is a question almost nobody asks, and it's the most important one: when a company sells its shares in an IPO, who decides the price?

The answer is not "the market." The answer is not "some fair, neutral referee." The price is chosen by the sellers themselves - the company's owners (called the promoters) and the investment bankers they hire to run the sale. That's it. The people who most want a high price are the very people who pick the price. Nobody on the buying side gets a vote. You are simply shown a number and asked, take it or leave it.

Think about how strange this is compared to a normal purchase. When you buy vegetables, you can push back on the price. When you buy a used phone, you haggle. But in an IPO, the seller sets the price, and thousands of buyers just line up to pay it. And the sellers are not amateurs. The bankers running the sale are paid a percentage of the money raised, so they have their own reason to push the price as high as the crowd will bear. Their whole skill is judging exactly how much excitement is in the air and pricing right up to the edge of it - high enough to squeeze maximum money out of buyers, just low enough that the shares still find takers.

So when you look at an IPO price, don't think of it as a fair value handed down by nature. Think of it as an asking price set by someone who wins when it's high. Show me the incentive and I'll show you the outcome - the people who set the IPO price are paid more when it's higher, so the price leans their way, not yours. That single sentence should change how the whole event feels.

There's a second decision the sellers control, and it's just as powerful as the price: they choose when to sell. A company doesn't have to go public in any particular year. The owners get to pick the moment. And a sensible seller sells when buyers are most eager - because eager buyers pay more.

When are buyers most eager? When the market is hot. When the news is full of stories about people getting rich in shares. When a certain kind of business - let's say green energy, or a food-delivery app, or anything with a shiny future - is the flavour of the season and everyone wants a piece. In those windows, a crowd of buyers will pay dreamy prices for almost anything with the right story attached. That is exactly when the doors of the IPO factory swing open. When markets are gloomy and buyers are scared, the same owners quietly wait. They are not going to sell their shares cheaply to a nervous crowd; they'll wait for the crowd to get excited again.

So think about what this timing means for you. You tend to hear about IPOs precisely during the hottest, most excited, most expensive moments - because that's when companies choose to sell, and that's when the news screams loudest about them. The very conditions that make you feel "everyone's making money, I should jump in" are the conditions the seller was waiting for. You are being invited to the party at the exact moment the host has decided it's the best time to sell you a ticket. A hot story and a rising market are what let the seller pick a high price - the excitement in the air is the seller's tool, not your signal.

None of this means the company is bad or the owners are crooks. A shopkeeper who sells his shop when buyers are keenest is just being smart. But you must be clear-eyed: their smart timing is the opposite of your good timing. Their best moment to sell is very often your worst moment to buy.

Let's put rupees on the table and walk through a typical hyped IPO from start to sad finish. illustrative

A company called Skyline Foods runs a food-delivery app. It's genuinely popular - lots of people use it - but it has never earned a profit; it spends more than it makes, hoping to grow big first. The market this year is on fire, and "app" companies are the flavour of the season. The owners and their bankers look around, see how excited everyone is, and decide now is the moment. They set the offer price at ₹300 a share. Notice: they picked that number, at this hot moment.

In the weeks before the listing, the excitement machine roars. A whispered number goes around - the "grey market premium" - suggesting people are already willing to pay ₹430 for a ₹300 share, a 43% jump before it even lists. Every news channel repeats it. Rohan, a young office worker, hears his friends applying and feels that hot don't-miss-out voice. He doesn't read a single page about the company's profits (there aren't any). He just wants in. He gets ₹60,000 worth allotted at ₹300.

Listing day arrives, and it's a party. The share opens at ₹430 - up 43%, exactly as promised. For one glorious morning, Rohan's ₹60,000 is "worth" about ₹86,000 on screen. Everyone who told him to buy looks like a genius. This jump, this listing-day pop, is the moment the whole show was built for.

But here's what the party hides. Who was selling at ₹430 that morning? Often the very insiders and quick-flip traders who got in early and now happily hand their shares to the excited crowd at the top. The pop isn't proof the business is wonderful; it's just proof the excitement peaked on that one day. And excitement is not the same as earnings.

Over the next eight months, the noise fades. The company still isn't making a profit. The market flavour moves on to something else. With no exciting story to hold it up, the share price drifts down, and down: ₹380, then ₹320, then straight through the ₹300 offer price, and on to about ₹210. Rohan's ₹60,000 is now worth around ₹42,000. He's lost ₹18,000 - not because he was unlucky, but because he paid a dreamy price at the dreamiest possible moment, for a business that had to earn its keep eventually and couldn't. The listing-day pop that felt like a gift was really the trap door.

Let's slow down on that "grey market premium" (people call it GMP), because it fools a lot of good people. GMP is an unofficial number - a rumour, really - about how much extra some traders are willing to pay for the shares before they even list. A high GMP is treated by the excited crowd as proof: "See? It's already worth more than the offer price, so it's a bargain!"

But stop and think about what GMP actually is. It's a bet about listing-day mood, not a judgement about what the business is worth. It says, "On the first day, a lot of people will probably be excited and pay up." That's all. It tells you nothing about whether the company earns money, whether the price makes sense for someone holding for years, or whether the excitement will last past lunchtime. A confident-sounding number attached to a hot story is one of the oldest ways to make excitement look like evidence. A confident number stapled to a story is exactly how a crowd's excitement gets dressed up as proof.

The listing pop and the GMP are bait. They are designed to make you feel that getting in is a sure, quick win. But a quick pop that you didn't sell into is just a number that flashed on a screen; if you held on - as most small buyers do, because they were told this was a great long-term company - the only number that matters is where the price settles once the excitement drains away. And once the excitement drains, price drifts back toward what the business is actually worth. That's the real gravity in the market, and no amount of grey-market chatter can switch it off for long.

Now we can state the single most useful attitude to carry into any IPO. It sounds harsh, but it's really just clear thinking: assume the price is too high until you can prove otherwise.

Why start there? Because of everything we've just seen. The seller sets the price. The seller picks the hottest moment to sell. The seller hires expert pricers who push right to the edge of what the crowd will bear. Every force shaping that number is pulling it up. There is no friendly force pulling it down to a bargain for you - no kind referee, no rule that IPOs must be cheap. So the honest starting guess, before you know anything else, is: this is priced for the seller's benefit, which means it's probably at the expensive end, not the cheap end.

This is where the deepest idea in all of investing does its quiet work. There are two different numbers hiding inside every share. One is the price - the number on the tag, what they're asking. The other is the value - what the business will actually earn for its owners over the years, patiently, whether or not anyone's excited. In a calm, boring purchase these two numbers sit close together. But in a hot IPO, the price is puffed up by excitement and clever timing while the value - the real earning power of the business - hasn't changed at all. So the gap between them yawns wide open, almost always with price far above value. The offer price is what they're asking; the value is what the business will really earn for you as a part-owner - and in a hyped IPO those two numbers are usually far apart.

So "it's probably overpriced" isn't cynicism. It's just refusing to forget who set the price and why. It's the buyer finally sitting up straight, remembering that this is a sale, and asking the seller's asking price to justify itself - the way you'd squint at any asking price when you know the seller is skilled and motivated and picked this exact moment to sell.

Let's make the buyer-versus-seller gap real in rupees, because when you see both scoreboards at once it becomes impossible to un-see. illustrative

Arjun founded a company that makes fancy home gadgets. Years ago, he and two early backers put in money when the company was small and unproven. Now the market is hot, gadget companies are fashionable, and his bankers tell him this is the perfect window. In the IPO, Arjun and his early backers sell a chunk of their own shares to the public and, between them, take home ₹120 crore in cash. That money is now theirs, locked in, done. Whatever happens to the share price next, they already got paid at the top of the excitement.

On the other side sits Haridya's cousin, Aman, one of thousands of small buyers. He puts ₹90,000 into the IPO at the offer price because the story is thrilling and everyone's applying. He is buying the shares that Arjun and friends are so keen to sell - at the price Arjun's bankers chose, at the moment Arjun's bankers chose.

Now watch the two scoreboards over the next year. The gadgets sell fine, but the business was never worth the dreamy price; the excitement fades and the shares drift down 35%. Aman's ₹90,000 becomes about ₹58,500 - he's out ₹31,500 of real money. And Arjun? His ₹120 crore is untouched, sitting safely in the bank, earning him more elsewhere. One side of the table cashed out real wealth at the peak; the other side is holding the bag as the price sinks toward what the business was actually worth all along.

This is the picture to burn into memory. In a hot IPO, the reliable winner is the seller, who converts excitement into locked-in cash. The buyer is hoping the excitement lasts long enough, or the business grows fast enough, to justify what he paid. Hope on one side; booked profit on the other. When you catch yourself feeling lucky to be allotted IPO shares, ask the plain question: lucky to be handed shares that skilled, motivated insiders were so eager to sell me, at their price, on their chosen day? Before you admire the offer, follow the money - the person most eager to sell at this price, on this day, usually knows something about the price that you don't.

There's a quiet trap hiding inside how IPO shares get handed out, and once you see it you'll never feel quite so lucky to be allotted shares again. It works like the scramble for anything genuinely good and cheap: when lots of people chase the same limited thing, whoever "wins" it is usually the one who wanted it most badly - and wanting something most badly is exactly how people end up overpaying. In a crowded grab, the winner isn't the smartest buyer; the winner is the one who reached furthest.

Now watch how this plays out in the odd arithmetic of an IPO allotment. illustrative

Vikram applies to two IPOs in the same month. The first is a quietly excellent, fairly-priced business, and the careful, informed buyers have all spotted it - so everyone piles in and the offer is oversubscribed forty times. Vikram asks for ₹1,00,000 worth of shares and, after the lottery, is allotted a measly ₹2,500 worth. He barely gets any. It feels like a disappointment.

The second IPO is a dull, richly-priced business, and the informed buyers took one look at the earnings and quietly walked away. Because so few people wanted it, Vikram gets his full ₹1,00,000 allotment, easily, no lottery at all. It feels like a win - he got everything he asked for!

But flip it over. The IPO he could barely get into was the one clever money fought for; the IPO he got completely was the one clever money refused. His easy, full allotment isn't a prize - it's a signal that the buyers who did their homework said no, leaving the whole pile for him. Sure enough, the first share drifts up over the year while the second sags 30% below its offer price. The very ease of "winning" the second one was the warning. In a scramble to buy, the one who easily gets his full allotment is usually the one who overpaid - the genuinely good deal is fought over and you get almost nothing, while the offer you can grab in full is the one informed buyers quietly declined.

So next time you get your entire IPO application filled with no trouble, don't celebrate - pause. Ask why nobody else wanted what you just found so easy to buy. Sometimes there's an innocent reason. But often, the answer is the plainest one: the people who checked the price walked away, and the market simply handed you their leftovers.

If the honest starting point is "probably overpriced," then the honest rule for buying is: treat every IPO as guilty until proven cheap. Not guilty until proven good - plenty of IPOs are fine businesses. Guilty until proven cheap, because a fine business at a silly price is still a bad buy. The question is never "is this a nice company?" The question is "is this a fair price for a part-owner who plans to hold, with a cushion in case I'm a bit wrong?"

So what does "proving it cheap" actually look like? Let's watch someone do the work. illustrative

Haridya is the careful sort. A new IPO lands - a maker of industrial pumps, priced at ₹500 a share. She ignores the GMP chatter completely and asks boring questions. How much does the business actually earn per share in a year? About ₹20. So at ₹500, she's paying 25 times a year's earnings. Then she looks at an already-listed, similar pump company trading quietly on the exchange - same kind of business, solid record - and finds it priced at about 14 times its earnings. Same industry, and the IPO is asking her to pay far more for the newcomer than she'd pay for a proven, listed peer. That extra price isn't buying her anything real; it's buying the seller's excitement. She puts it in the reject pile and doesn't look back.

A few months later a different IPO appears - an unglamorous cable-and-wire maker nobody's excited about, priced at about 12 times its earnings, in line with or a touch below its listed peers, with a long record of real profits and modest borrowing. There's no hot story, no big GMP, no crowd. Precisely because there's no excitement, the seller couldn't puff up the price. Haridya does her homework, finds a fair price with a cushion, and buys a modest amount. Notice the pattern: the IPO she bought was the dull one that offered no thrill, and the one she rejected was the exciting one everyone wanted. Proving an IPO cheap almost always means finding the quiet one the crowd ignored, not winning the scramble for the loud one.

And here's the freeing part of "guilty until proven cheap": most of the time, you won't be able to prove it, so you'll simply pass - and passing costs you nothing but a might-have-been. Your money stays safe, ready for the rare IPO that really is fairly priced, or for a proven company already listed and quietly on sale. You don't have to catch every train. You only have to avoid boarding the ones heading off a cliff.

The slip is almost never "I decided to gamble." It's the don't-miss-out feeling from the very first section, dressed up in respectable clothes. It whispers, "This isn't gambling - it's a real, famous company, it's in all the papers, smart people are buying, and it's already up before it even listed." Every one of those things is true, and none of them tells you whether the price is fair. Fame, coverage, a crowd, and a pop are all just excitement wearing a suit.

Here's how the trap closes. You skip an IPO wisely, and then you have to watch it pop 40% on listing day while everyone celebrates. That pop feels like a slap. Your careful "no" feels like cowardice. So the next hot IPO, you promise yourself you won't "miss out again," and you jump in without checking the price - straight into the exact overpriced deal the seller built for you. The pop you can see on the one that got away bullies you into ignoring the sag you can't see coming on the one you're about to buy.

Now the honest balancing, because "IPOs are bad" is too blunt a rule and could steer you wrong in its own way.

First, not every IPO is a rip-off. Genuinely good businesses go public, and some of them list at sensible prices - usually the quiet ones, in cooler markets, that the crowd isn't screaming about. A few early buyers of fairly-priced IPOs do perfectly well. The lesson isn't "never touch an IPO." It's "assume overpriced until you've checked, because the odds are stacked that way - and be willing to buy the rare one that passes." A blanket refusal to ever look would occasionally make you skip a genuinely fair deal.

Second, the sellers aren't villains. A founder selling shares at a good moment is doing something completely normal and fair - the same thing you'd do selling a house in a hot market. There's no cheating here, and you shouldn't read evil into it. The point isn't that the seller is bad; it's simply that the seller is on the other side of the table from you, and their interests point up while yours point down. You protect yourself not by getting angry at them, but by remembering which side you're on.

Third, being cautious isn't the same as being right. You still have to be cautious about the correct things - the actual price versus the actual earnings, the borrowing, the honesty of the owners - not silly things like whether the logo looks modern. It's quite possible to reject a fair IPO for a foolish reason and still get tricked by an expensive one because you never did the real homework. And the opposite failure is real too: an investor so scared of IPOs that they never buy anything at all, and let inflation quietly nibble their idle savings, has just chosen a slower way to lose. The goal was never fear. The goal is to buy fair value and refuse dreamy prices - and an IPO is simply the place where dreamy prices are most likely to be waiting for you.