Initial Public Offerings (IPOs) in India have generated massive excitement among retail investors. They provide an opportunity to invest in companies before their shares trade on the open market. However, beneath this excitement lies a deep concern: do Indian IPOs favor insiders over retail investors?
Insider favoritism in IPOs refers to practices that benefit promoters, institutional investors, and company executives while retail participants receive less favorable terms—or get entirely excluded from the gains. This article explores how insider favoritism works in Indian IPOs, what recent trends reveal, and how this impacts trust in the capital markets.
Understanding the IPO Allotment Structure in India
Indian IPOs follow a structured allocation mechanism defined by the Securities and Exchange Board of India (SEBI). The typical quota includes:
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Qualified Institutional Buyers (QIBs) – 50%
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Non-Institutional Investors (NIIs or HNIs) – 15%
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Retail Individual Investors (RIIs) – 35%
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Anchor Investors – These are part of the QIB category but receive allotment a day before the IPO opens.
While the allocation seems fair on paper, the execution raises questions about how retail investors experience significant disadvantages compared to insiders.
Anchor Investors and Their Influence
Anchor investors receive guaranteed allocations before public bidding starts. These institutional investors often include mutual funds, sovereign wealth funds, and foreign portfolio investors.
Companies often use anchor placement to build credibility. However, anchors benefit from early access to shares and sometimes offload them quickly once lock-in periods expire, creating a volatile price drop that retail investors absorb.
In many IPOs, anchor investors exit within weeks. Their early exit depresses stock prices, leaving retail participants holding overvalued stocks. This practice doesn’t violate any regulation, but it reveals structural privilege for insiders.
Grey Market Premium and Retail Hype
Before IPOs hit the market, unregulated “grey market” trading starts. Here, insiders—including brokers and distributors—buy or sell IPO shares based on speculative pricing called Grey Market Premium (GMP).
This informal market builds hype. Retail investors, influenced by GMP buzz, over-subscribe to IPOs. However, insiders with early knowledge often sell into this frenzy. When the stock lists at a price below GMP expectations, retail investors bear the brunt.
This system creates asymmetric information flow. Insiders access share allotment data and internal pricing rationale long before retail investors see the red herring prospectus.
Selective Pricing and Valuation Manipulation
In several Indian IPOs, company promoters and merchant bankers inflate valuations to maximize gains. They project aggressive growth, dress up balance sheets, and price shares at a premium. Institutional investors often support this pricing—sometimes because they participate in the pre-IPO round at lower valuations.
Retail investors receive shares at the final IPO price, which frequently includes significant markup over previous private placements. This allows pre-IPO investors to exit at a profit immediately upon listing, while retail participants get minimal room for upside.
Examples of Insider-Favoring IPOs in India
Paytm (One97 Communications) – November 2021
Paytm’s IPO raised ₹18,300 crore in the biggest listing at the time. However, institutional investors, including SoftBank and Berkshire Hathaway, offloaded their shares during the IPO. They had purchased Paytm stock years earlier at far lower valuations.
The stock listed at a discount and crashed over 27% on debut. Retail investors who bought into the IPO hype suffered significant losses. Meanwhile, early investors exited with handsome profits.
Zomato – July 2021
Zomato’s IPO raised ₹9,375 crore and listed at a strong premium. Early investors like Info Edge and Ant Financial sold part of their holdings during the IPO. Retail investors paid a higher price for shares based on forward-looking projections and bullish narratives.
Zomato’s stock witnessed extreme volatility post-listing. Although anchor investors booked early profits, retail participants saw value erosion within months.
The Flipkart-Walmart Case: A Missed IPO Opportunity
Although not an IPO, the Flipkart-Walmart deal in 2018 reveals the problem of exclusion. Walmart acquired Flipkart in a private deal worth $16 billion. Indian retail investors never got a chance to invest in Flipkart because it never listed in India.
Most Indian unicorns raise capital from global venture capital firms and then exit through trade sales or foreign listings. Retail investors remain spectators in wealth creation stories that benefit only insiders.
Regulatory Loopholes and Weak Enforcement
SEBI has introduced reforms to improve IPO transparency. Rules now require companies to disclose use of proceeds, provide risk factors, and list institutional investors. However, loopholes remain:
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Promoters still influence merchant bankers during IPO pricing.
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Anchor investors lack long-term lock-in periods.
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Non-institutional investors sometimes game the system by applying with multiple PANs, blocking genuine retail access.
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Retail investors receive limited data to judge fair valuations.
Without stronger surveillance and stricter compliance, these issues will continue to persist.
Retail Investor Psychology and Herd Behavior
Retail investors often chase momentum and brand value. High-profile IPOs backed by celebrities or media buzz create frenzy. Retail buyers, influenced by FOMO (Fear of Missing Out), ignore fundamentals and enter overhyped offerings.
Insiders understand this behavior. They use retail interest to build oversubscription, creating artificial demand and ensuring full allotment to themselves before exiting.
The short-term mindset among many retail investors, combined with poor financial literacy, makes them easy targets.
Steps Needed to Ensure Fairness in IPOs
To ensure IPOs serve the public equitably, regulators, exchanges, and issuers must introduce reforms:
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Stricter Lock-in for Institutional Investors – Extend anchor lock-in periods to six months instead of one month.
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Fair Pricing Audits – Appoint independent valuation auditors to review IPO pricing rationale.
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Retail Allotment Reforms – Increase retail quota from 35% to 50% in consumer-facing IPOs.
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Transparent Roadshows and Disclosures – Mandate roadshow transcripts and pricing discussions to be public.
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Ban Pre-IPO Private Placements Right Before Listing – This limits insider profit-taking from last-minute valuation arbitrage.
Conclusion: A Tilted Playing Field
Indian IPOs attract mass participation, but insiders enjoy structural advantages at every stage. Anchor investors, pre-IPO stakeholders, promoters, and large funds use their privileged access to secure profits before retail investors enter.
From pricing manipulation and selective disclosures to early exits, the IPO system rewards insiders while exposing retail participants to disproportionate risks. Although SEBI has taken steps to increase transparency, enforcement remains weak.
Retail investors must approach IPOs with caution. Evaluating the company’s fundamentals, management credibility, and long-term outlook remains crucial. Blindly following grey market premiums, oversubscription headlines, or celebrity endorsements can lead to costly mistakes.
The Indian capital market must evolve into a more equitable space. Without structural reform and stronger investor education, IPOs will continue to favor insiders over the very public they claim to empower.
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