Model Answer

An Initial Public Offering (IPO) is a company's first public share offering in the primary market. India's mainboard IPOs raised approximately ₹1.77 lakh crore in FY2025–26, reflecting growing capital market participation.

Role of IPOs in Capital Market Development

1. Capital mobilisation provides long-term equity funding for business expansion. e.g: Fresh issues finance new projects.
2. Financial inclusion enables retail investors to participate in corporate growth.
3. Market deepening increases listed companies and investment opportunities. e.g: NSE Emerge and BSE SME platforms.
4. Entrepreneurship promotion provides startups access to public capital. e.g: Zomato's IPO (2021).
5. Liquidity creation allows investors to trade shares after listing.
6. Corporate governance strengthens disclosures and accountability through SEBI regulations.
7. Economic growth supports investment, employment and infrastructure development.

Major Challenges

1. Overvaluation exposes retail investors to post-listing losses. e.g: Paytm's post-IPO share price decline.
2. Speculative trading encourages short-term listing-gain expectations.
3. Information asymmetry disadvantages inexperienced retail investors.
4. Offer-for-sale dominance limits fresh capital formation when proceeds go to existing shareholders.
5. Market volatility affects IPO subscriptions and valuations.

Way Forward

1. Strengthen disclosures on valuations, risks and fund utilisation.
2. Improve investor literacy through SEBI awareness programmes.
3. Ensure regulatory oversight against misleading disclosures and market manipulation.
4. Promote quality listings through transparent governance and credible financial reporting.

IPOs deepen India's capital markets by mobilising savings and supporting enterprise growth. Strong investor protection is essential for sustainable capital formation.