Between 2020 and 2022, India saw a record IPO boom. Paytm, Zomato, Nykaa, Delhivery, LIC | hundreds of companies listed. Retail investors poured billions into IPO subscriptions. The grey market premium (GMP) became a household number. And then many of these listings underperformed dramatically.
Understanding IPOs isn't just interesting | it's directly relevant for systematic investors because new listings eventually enter the Nifty 500 universe. Knowing how the IPO process works, what drives pricing, and what the evidence says about post-listing performance changes how you think about newly listed stocks in your strategy universe.
How the book building process works
Almost all mainboard IPOs in India use the book building method. Here's the process step by step:
The investor categories and their quotas
Grey market premium (GMP) | what it is and isn't
The grey market is an unofficial, unregulated market where IPO shares are bought and sold before listing. The grey market premium (GMP) is the price at which allotted shares trade in this unofficial market above the IPO price. If an IPO is priced at ₹500 and the GMP is ₹150, shares are changing hands at ₹650 in the grey market.
GMP is widely followed by retail investors as a predictor of listing gains. It's often self-fulfilling | high GMP creates excitement that drives listing day buying. But it's an unreliable signal for long-term investors because:
- GMP reflects short-term speculative demand, not fundamental value
- It can change dramatically in the days before listing based on market conditions
- Grey market participants are often HNI/NII applicants who want to flip allotted shares quickly | their motivation is day-one gain, not multi-year ownership
GMP is not investment advice. Many IPOs with high GMP on day one have significantly underperformed over 12 to 24 months. Don't confuse listing day speculation with investment merit.
Lock-in periods and the overhang problem
After a company lists, not all shares are immediately tradeable. SEBI mandates lock-in periods:
- Promoters: 18 months for minimum promoter contribution (20% of post-issue capital); 6 months for the rest
- Pre-IPO investors (PE/VC): 6 months post-listing
- Anchor investors: 30 days for 50% of their allocation, 90 days for the rest
When lock-ins expire, large volumes of shares held by promoters and institutional investors can come to market | this is called the lock-in expiry overhang. It's one reason why many IPOs face selling pressure 6 months after listing.
For systematic investors: Be aware that a stock newly added to the Nifty 500 may have a lock-in expiry approaching. A factor screen that selects this stock might face headwinds from institutional selling around the lock-in expiry date.
What the evidence says about IPO performance
The academic and empirical evidence on IPO investing is fairly consistent globally and in India:
- Short-term (listing day): On average, IPOs generate positive listing day returns | this is the "IPO underpricing" phenomenon documented by Ritter (1991) and others. But allotment is often low in oversubscribed IPOs, so the actual dollar gain for retail investors is small.
- Medium-term (1 to 3 years): IPOs significantly underperform secondary market benchmarks on average. The long-run underperformance of IPOs is one of the most robust findings in finance | true in the US, UK, and Indian markets.
- Why: IPOs are issued when companies (and their investment bankers) believe conditions are favourable | often at market peaks. The information asymmetry between issuer and investor is at its maximum. The "hot IPO market" phenomenon (2021 in India) typically precedes a period of poor performance for the cohort.
RupeeCase factor strategies operate on the Nifty 500 universe. A newly listed company doesn't enter this universe until it meets size and trading history requirements for Nifty 500 inclusion. This provides a natural filter | by the time a company enters the RupeeCase universe, it has at least several months of trading history and its lock-in overhang has largely passed. The recency bias that makes retail investors over-allocate to hot IPOs doesn't affect systematic strategies built on Nifty 500. Access the full universe at invest.rupeecase.com.
In October 2021 I remember having the price band argument with 3 different friends. Everyone said Paytm at 2150 is a once in a decade chance to own a fintech super app. Grey market premium was climbing, anchor book was who's who. I did not apply. Not because I had some magic model. Because the post money valuation made zero sense versus any SaaS comparable I could pull on Bloomberg. 2 days later it listed at minus 9 percent. 24 months later it was 63 percent below issue. The lesson was not Paytm specific. The lesson was: when the QIB anchor book and the grey market are both screaming and retail has 10 percent quota, retail is the exit liquidity. Since then I have a simple rule. Wait 6 months after listing, wait for the first post IPO annual report, let the lock in overhang clear, then let the Nifty 500 screen decide. The IPO excitement tax is the most expensive tax in Indian equity.
Glossary
Sources & further reading
- → SEBI ICDR Regulations 2018
- → NSE India | IPO Information
- → Ritter, J. (1991). The Long-run Performance of Initial Public Offerings. Journal of Finance.
- → NISM Series X-A | Investment Adviser (IPO chapter)
Quick check, Module 6.2
Retail IPO Allotment Probability
Indian IPO retail allotment is via lottery when oversubscribed. Each application gets one chance regardless of bid size; multiple applications in the same family help.