Summary of this article
IPOs may temporarily lock money that could otherwise flow into listed stocks
Strong SIP flows suggest investors are still putting fresh money into equities
Large OFS deals could create more lasting pressure on secondary-market liquidity
Nine mainboard initial public offerings (IPOs) have raised Rs 3,951.16 crore so far in September, but the primary market is set for a much bigger test in the weeks ahead. Another 13 mainboard IPOs worth Rs 32,316.73 crore are in the pipeline, led by the National Stock Exchange (NSE), which plans to raise Rs 26,579.64 crore. Apart from these, there are dozens of small and medium enterprise (SME) IPOs hitting the primary market this month.
With several large issues competing for investor money at the same time, the question is whether the primary market could temporarily pull enough liquidity away from existing stocks to weigh on secondary-market trading.
The concern comes as cash-market activity has already softened in recent months. Average daily turnover on the NSE stood at Rs 1,13,037.27 crore so far in September, lower than Rs 1,19,681 crore in August and Rs 1,20,416 crore in July. It was higher at Rs 1,31,983 crore in June, Rs 1,41,637 crore in May and Rs 1,34,709 crore in April.
September's numbers are still incomplete, so it would be premature to draw a firm conclusion from the moderation. But the data shows that cash-market turnover has remained below the levels seen earlier this year, even as the primary market is gearing up for a busy stretch.
The rush in the primary market is also being driven by a regulatory deadline. The Securities and Exchange Board of India (Sebi) had extended the validity of IPO approvals that were set to expire between April 1 and September 30, 2026, allowing issuers to use the window until September 30 without restarting the approval process.
Under the normal route, an observation letter is valid for 12 months, while approvals under the confidential filing route remain valid for up to 18 months.
With the September 30 deadline drawing closer, issuers and investment bankers are looking to push through offerings before the window closes. A number of companies with approvals nearing expiry are therefore expected to head to the market in the coming weeks.
A cluster of IPOs opening together can also put temporary pressure on secondary-market liquidity. Money committed to IPO applications remains blocked during the subscription period, and the amount can rise sharply when investors apply for several issues or bid for amounts far above the shares on offer.
"Several issues are getting applications worth multiples of the issue size, in some cases running into thousands of crores against issue sizes of just a few hundred crores. That money sits blocked via ASBA for the three to four day subscription window," said Perumal Raja, equity research associate director at FundsIndia.
"With multiple IPOs running concurrently, the cumulative amount blocked at any given time can be substantial. That does put near-term pressure on secondary-market liquidity and trading volumes, but it's a temporary squeeze tied to the subscription cycle, not a structural drain on the market," he said.
The scale of the primary-market activity means the amount of liquidity temporarily locked can be significantly higher than the headline amount being raised. Piyush Jhunjhunwala, CEO and founder of Stockify, a platform to trade unlisted and pre-IPO shares, also reiterated, “The actual liquidity drawn from the market could be more than the issue sizes since the oversubscription of shares blocks the funds until allotment takes place."
"It may happen to reduce the marginal purchasing and trading power of the investors, especially the institutional investors. However, domestic institutional buying would cushion the impact of the IPOs. Hence, the likely effect is reduced liquidity in the secondary market."
A large part of the money blocked for IPO applications is not permanently leaving equities. Once allotments are completed, funds that are not used are released and can return to the secondary market.
"We are not seeing widespread selling of existing portfolios solely to fund IPO applications," said Bharat Lahoti, president and co-head, factor investing, Edelweiss Mutual Fund.
"The current IPO pipeline is sizeable, but in the context of the overall Indian equity market, the amount being raised remains relatively modest. While some temporary diversion of liquidity toward IPO subscriptions is inevitable, particularly from retail and high net worth individual (HNI) investors, the impact on secondary-market liquidity is likely to be short term rather than structural," he said.
Lahoti said strong flows through systematic investment plans (SIPs), with monthly numbers stable around Rs 32,000 crore, suggest that investors are continuing to bring fresh money into equities rather than withdrawing from the asset class.
But the allocation of that incremental money is changing.
"However, a higher proportion of incremental capital is increasingly getting absorbed by IPOs and other primary market issuances, reducing the liquidity available for secondary-market purchases," Lahoti said.
Raja also does not see evidence of investors systematically dismantling their existing equity portfolios to participate in IPOs. Retail shareholding in listed companies has continued to rise quarter-on-quarter, while SIP flows have remained resilient.
"What the data does show is that most IPO allottees exit within a week of listing," Raja said. "That looks far more like surplus or speculative capital chasing a listing-day pop than investors rotating out of their core secondary-market portfolios to fund it."
The bigger issue could be the nature of the IPO itself.
Santosh Meena, head of research at Swastika Investmart, said the ongoing IPO and offer for sale (OFS) boom has already diverted liquidity from the secondary market. Domestic secondary inflows, he said, have fallen from around Rs 1.42 lakh crore in March to roughly Rs 35,000-40,000 crore in July-August, while primary-market absorption has increased.
"IPO fundraising impacts secondary liquidity through temporary locking of application money and, more importantly, through the structure of the issue," Meena said.
A fresh issue and an OFS have different implications for market liquidity. In a fresh issue, the money goes to the company and can eventually support expansion, debt repayment or other corporate requirements. In an OFS, the proceeds go to existing shareholders selling their stake.
That makes a large OFS more relevant from a liquidity perspective.
"Pure OFS deals, such as the expected NSE IPO of Rs 26,579.64 crore, transfer proceeds to selling shareholders who may exit equities entirely, creating a net drain," Meena said.
At the same time, a large IPO does not necessarily mean a corresponding amount of money permanently exits secondary equities. Institutional investors can allocate between primary and secondary markets, while domestic institutional buying can offset some of the pressure.
"The sustainability of secondary-market flows will ultimately depend more on earnings growth, valuations, domestic institutional and retail flows, and FII participation," Lahoti said.
There is little to suggest a liquidity crisis at this stage. The IPO rush can, however, put a temporary squeeze on the money available for stock purchases. With several issues open at the same time, investors block funds in IPO applications, leaving less cash for trades in the secondary market. A large chunk of that money returns once the allotment is done.
The pressure could build if foreign investors keep selling, crude stays expensive and sentiment in the broader market remains weak. IPOs would then be drawing from the same pool of money that could otherwise have gone into listed shares.
