The Winner’s Curse in India’s IPO rush: Between euphoria and reality

The numbers paint a stark picture. By March 2025, half of the 2024 IPOs had traded below their issue price—39% down by 20%, and 27% down by 50%.

SMEs were hit hardest, highlighting greater vulnerability in smaller listings. About 51% of SME IPOs fell below their issue price—41% lost more than 20%, and nearly one-third dropped by over half. As for non-SMEs, 45% fell, 33% dropped beyond 20%, and 19% lost over 50%.

Median losses: 56.8% overall, 59.3% for SMEs, and 43.2% for non-SMEs.

The trend continues in 2025. By early September, 40% of the IPOs were below issue price, with 23% down by over 20%, and 15% down by over 50%. Again, SMEs bore the brunt (46%, 28%, 20%), while non-SMEs showed more resilience (24% below issue price, 2% deep losses), suggesting that the 2024 pattern of sharper SME weakness persists.

Understanding the Winner’s Curse

This is not just about bad luck. The idea of what economists call the “winner’s curse" comes from auction theory, where the winner often pays more than the intrinsic value of the asset because of over-optimism.

In IPOs, the curse manifests when well-informed institutional investors stay away from overpriced issues while retail investors pile in based on hype. Those who are most eager to win IPO allotments end up holding the weakest cards. Once the dust settles, prices slide, leaving retail investors nursing losses.

In India, this problem is magnified. Institutional investors—armed with analyst calls, sector reports, and management interactions—are selective in their bids. Retail investors, on the other hand, often rely on media coverage, grey market premiums, or simply the fear of missing out.

If informed bidders stay away and an IPO is still oversubscribed by retail investors, it often signals trouble.

Zomato, Paytm, and the perils of euphoria

The IPOs of Zomato (Eternal Ltd) and Paytm (One 97 Communications Ltd) illustrate the dynamics of the winner’s curse.

Zomato’s 2021 IPO was oversubscribed more than 30 times fuelled by frenzied demand from retail investors. The stock initially soared but soon corrected sharply as questions emerged about profitability and business sustainability.

Similarly, Paytm’s much-hyped listing became India’s largest-ever IPO at the time, at ₹18,300 crore. Retail investors rushed in. But within days of listing, Paytm’s stock collapsed, wiping out billions in investor wealth. Those who were most enthusiastic at the offering stage were left nursing losses.

These cases underscore a broader pattern. The euphoric subscription numbers mask the post-listing reality that many investors face—a classic outcome of the winner’s curse.

Lessons from global markets

India is not alone in facing these challenges. International markets offer rich lessons in managing IPO booms and investor protection.

In the US, the dot-com bubble of the late 1990s remains a cautionary tale. Internet startups with little more than business plans raised massive sums, only for their stocks to collapse once the hype faded. The lesson was clear: when valuations are driven more by speculative optimism than fundamentals, retail investors are often left holding the bag.

Hong Kong and Singapore, both vibrant IPO hubs, have developed mechanisms to curb retail excesses. In Hong Kong, the “clawback" mechanism ensures that if retail demand surges disproportionately, shares can be reallocated to institutional bidders to maintain pricing discipline. Singapore has leaned heavily on stringent disclosure requirements, making prospectuses more investor-friendly and accessible.

Europe, too, provides examples of caution. Regulators in markets such as Germany and the UK have increasingly mandated post-listing performance tracking, compelling companies to report whether their results align with pre-IPO projections. This accountability discourages overly rosy projections during IPO marketing.

China, after its own IPO manias, experimented with registration-based systems aimed at reducing regulator-led pricing distortions and allowing the market to discover value more organically. While still evolving, these reforms highlight the need to balance capital formation with investor safeguards.

What India can do better

The Securities and Exchange Board of India has been proactive. It has tightened disclosure rules for startups, kept a close watch on grey market activities, and introduced anchor investor lock-in periods to prevent immediate exits that could rattle sentiment. Yet, more can be done.

Investor education remains critical. Campaigns that simplify IPO concepts, valuation basics, and risks could prevent retail investors from treating IPOs as mere lottery tickets.

Regulators could also improve accountability by mandating improved disclosures including periodic post-listing reports comparing actual company performance with IPO promises, and transparency related to a promoter’s objectives and end use of the funds.

Striking a balance

The surge of IPOs is undeniably a vote of confidence in India’s growth story and capital markets. For companies, IPOs present an opportunity to access funds for expansion, innovation, and deleveraging. For investors, listings offer a chance to participate in the country’s economic transformation. But the exuberance must be tempered with caution.

The winner’s curse reminds us that in IPOs getting an allotment is not necessarily a victory. The real win lies in securing shares of companies that can deliver sustainable growth and value creation. Regulators, issuers, and investors all have a role to play in ensuring that India’s IPO boom remains a driver of wealth creation, not disillusionment.

Saumitra Bhaduri is a professor at the Madras School of Economics