A recent analysis by Bank of Baroda (BoB) has shed light on how companies are utilising the massive funds raised from initial public offerings (IPOs). The findings reveal a surprising trend: only about a quarter of the fresh equity capital is being allocated for creating new assets or capacity expansion. The majority of the funds are being channeled towards other corporate objectives like repaying debt and investing in subsidiaries.
Where is the IPO Money Really Going?
The research paper authored by Madan Sabnavis, Chief Economist at Bank of Baroda, provides a detailed breakdown of the deployment of IPO proceeds. The study examined 189 companies that have either tapped the equity market or filed their draft papers in the current fiscal year (FY25).
The data presents a clear picture:
- Capital Expenditure (Capex): Merely 26% of the fresh equity raised is earmarked for new projects and expansion.
- Debt Repayment: A larger chunk, 29%, is designated to pay off existing loans.
- Investment in Subsidiaries: About 9% of the funds are allocated for this purpose.
- Working Capital: Around 6.2% is set aside to reduce working capital borrowings.
- Unspecified Use: The allocation for a significant 24.5% of the funds remains unspecified in the disclosures.
This means that from the total intended fundraise of ₹1.82 lakh crore, the actual fresh capital coming into the businesses is lower. Sabnavis points out a critical detail: 66% of this amount is through fresh issuance, while the remaining 34% is via an Offer for Sale (OFS) where existing shareholders sell their stake. The proceeds from an OFS go directly to the selling shareholders as profit and do not enter the company's coffers for business use.
The Bigger Picture: A Booming IPO Market
The report coincides with a period of unprecedented activity in India's primary market. According to data from Prime Database cited in the study, the first seven months of FY25 alone saw 96 companies raising ₹1.25 lakh crore through IPOs, Follow-on Public Offers (FPOs), and OFS.
To put this surge in perspective, the total IPO fundraising in the full fiscal year FY24 hit a record ₹2.11 lakh crore from 105 companies. Even more striking is the five-year period ending FY24, which witnessed a total issuance of ₹5.66 lakh crore from 413 companies. This figure nearly matches the cumulative funds raised over the entire 15-year period from FY05 to FY20, which stood at ₹5.64 lakh crore.
Secondary Market Link and Expert Insight
This explosive growth in the IPO market has run parallel to a strong bull run in the secondary market. The report notes that the Nifty 50 delivered a cumulative return of 123% during this period, vastly outperforming the 62.6% return seen over the previous decade starting FY11.
Madan Sabnavis emphasises the importance of distinguishing between primary and secondary market activities. While secondary market trading involves money changing hands between investors, a primary market issue directly infuses capital into a company. A robust secondary market, however, encourages companies to tap the primary market, often at high valuations.
"A robust secondary market can motivate companies to seek additional capital, which may be at high premiums, thereby enhancing both the company's and the market's value," Sabnavis added. The key takeaway for investors is to scrutinise the object of the issue in IPO prospectuses, as it reveals how much money will actually be used for growth versus balance sheet management.
