A recent study by Bank of Baroda (BoB) reveals that only 26% of the funds raised through Initial Public Offerings (IPOs) are allocated towards capital expenditure (capex), with a larger portion being utilized for debt repayment. The study analyzed 189 IPOs, encompassing companies that have either accessed the equity market in the current fiscal year or have submitted draft red herring prospectuses, representing a total value of ₹1.82 lakh crore.
The analysis indicates that of the fresh equity raised, 26% is earmarked for capex, 29% for debt repayment, 9% for subsidiary investments, and 6.2% for working capital. Notably, the allocation for 24.5% of the funds remained unspecified. This trend raises concerns about the primary purpose of companies entering the public market.
Madan Sabnavis, chief economist at BoB, highlighted a key observation: 66% of the ₹1.82 lakh crore intended to be raised by these companies is through fresh issuance, while the remaining portion is directed towards existing shareholders via Offer for Sale (OFS). Sabnavis pointed out that when existing shareholders divest their stake through OFS, the proceeds go to them and do not contribute to the company's business objectives. The report suggests that approximately 65-67% of the total proceeds from an equity offering are likely to reach the businesses. Within this, around 26%, or 16.5% of the total equity raised, may be directed towards capex, while a slightly larger portion could be allocated for debt repayment.
The findings of the BoB study echo the sentiments expressed by Chief Economic Advisor V Anantha Nageswaran, who stated that IPOs are increasingly becoming exit routes for early-stage investors rather than vehicles for raising long-term capital. Nageswaran emphasized that this trend undermines the fundamental spirit of public markets, stressing the need for India's capital markets to evolve not only in scale but also in purpose.
The IPO market has demonstrated significant growth in FY25, raising ₹1.25 lakh crore from 96 companies, reflecting a strong upward trend. However, the allocation of funds reveals a shift in priorities, with debt repayment and other financial restructuring taking precedence over investments in expanding productive capacities.
In summary, the BoB study indicates a concerning trend in the utilization of IPO proceeds, where a relatively small portion is allocated for capex, while a significant amount is directed towards debt repayment and offer-for-sale by existing shareholders. This raises questions about the long-term implications for economic growth and the role of public markets in fostering productive investments.
