Investor Heterogeneity in Indian IPOs: A Comparative Study of Domestic and Foreign Market Behaviour

Initial Public Offerings are one of the most important ways through which firms gain access to public capital, increase their visibility and encourage long term growth. For the investors, IPOs offer a chance to invest in early-stage companies and get high returns. The Indian IPO market has seen high growth in recent years driven by economic development, advancement in the tech sector, increasing financial literacy and changes in the regulatory policy. Due to the the growth of IPOs, India has become a leading global spot for primary market activity. The increase in participation in the Indian market suggests an interesting trend which was the differences in the behaviour of domestic and foreign investors in the Indian IPO markets. These differences in behaviour are important for the policymakers, regulators and the firms that are looking to attract various investor groups. The roles of both domestic and the foreign investors have changed a lot in the past few years. This article talks about the sources of demand for IPOs, the effects of regulatory and tax reforms on the participation and analyses the spillover effects of heavily oversubscribed IPOs on the stock market volatility.

Source: Moneycontrol

Domestic Retail Investor Behaviour

Domestic retail investors have become the main driving force behind IPO subscriptions in India. Improvements in fintech have made opening bank accounts easier through e-KYC, while increased awareness through digital platforms has encouraged budding investors to enter the market. Retail participation is driven by sentiments, expectations of fast returns, and speculative indicators such as grey market premiums. Retail investors often view IPOs as a way to make quick profits rather than build long-term wealth. During the period 2020–2024, a large number of IPOs were oversubscribed due to strong retail participation, especially in offerings that were expected to deliver significant listing gains (Gupta & Kant, 2020). This trend reflects that Indian investors are heavily influenced by behavioural biases such as herd behaviour and a preference for widely recognised consumer brands.

Domestic Institutional Investors

Domestic institutional investors such as mutual funds, pension funds, insurance companies, and alternative funds have a more cautious approach towards investing in IPOs. They conduct detailed evaluations of a company’s finances, quality of governance, industry structure, competitive advantages, and future cash flow potential. Their involvement reflects their confidence in the broader market and helps in stabilising demand. A notable trend in recent years is the growing influence of domestic mutual funds, which have an increasing asset base that allows them to compete with foreign institutional investors in the Qualified Institutional Buyers (QIB) group. Unlike retail investors, domestic investors usually tend to have a mid- to long-term growth perspective that also favours companies with steady earnings, strong governance, and fair valuation techniques (Dharwadkar & Srinivasan, 2018). Their role has become especially important as India is increasing its domestic capital base and reducing dependence on foreign investors.

Foreign Portfolio Investors

Foreign investors, also known as Foreign Portfolio Investors (FPIs), are a crucial element in IPO demand. They usually focus on large, fundamentally strong IPOs that fit well with global investment themes such as digital transformation, pharmaceuticals, green energy, and tech-enabled services. Foreign investors emphasise the significance of transparency, governance, and adherence to international disclosure standards, and they avoid IPOs that are seen as overvalued or too speculative. Their participation validates not only the issuing company but also the market as a whole. Firms with a high level of global scalability, such as financial technology, e-commerce, and IT companies, usually attract a higher level of foreign investment. In contrast to domestic retail investors, FPIs give less importance to short-term listing gains and instead focus more on long-term performance, regulatory stability, and macro-level conditions such as interest rates, inflation, and currency stability.

While domestic and foreign investors have different risk appetites and investment timelines, SEBI’s tax reforms and regulatory policies have influenced both in interesting ways. The ASBA (Application Supported by Blocked Amount) mechanism and UPI-based systems have revolutionised the IPO application process for retail investors by removing refund delays and streamlining the process. This has also led to a significant increase in retail applications, especially for smaller IPOs. Stricter disclosure norms, tougher corporate governance policies, and mandatory risk factor reporting have improved transparency, benefitting foreign investors who depend on documentation and consistent financial reporting. Regulation has played a dual role—allowing widespread domestic participation while also increasing the credibility of Indian IPOs among foreign investors (Aggarwal, Klapper, & Wysocki, 2005).

Source: Insider Finance

Role of Regulation and Tax Reforms

The tax reforms also had a significant impact on participation patterns. Changes in capital gains taxation impacted investors more quickly because they depended on it for early exits and short-term gains. A high capital gains tax burden could reduce speculation shortly after listing, even though it does not completely remove the incentive for it. Foreign investors follow Double Taxation Avoidance Agreements (DTAA) and consider global tax regulations, which increases their willingness to participate in the Indian IPO market. FPIs based in Singapore and Mauritius benefit from favourable tax policies that reduce the overall tax impact of their Indian investments. These differences in structure reflect why foreign and domestic investors respond differently to taxation reforms.

Spillover Effects of Oversubscribed IPOs

One of the most interesting cases in Indian IPOs is the spillover effect of heavily oversubscribed IPOs on the stock market. Large IPOs usually create short-term liquidity mismatches as investors temporarily withdraw funds from the secondary market to subscribe to shares in IPOs. This is evident during times when companies such as LIC or Zomato issue shares, as retail investors pull out funds, move their portfolios, and try to maximise their allotments. Consequently, secondary market prices drop temporarily because of lower liquidity and selling pressure from investors freeing up their capital. This trend not only affects retail investors but also domestic investors who try to rebalance their portfolios during major IPO listings.

Source: Wallstreet Mojo

Listing Day Behaviour

On the listing day, the difference in investor behaviour comes to light. Retail investors tend to book profits immediately by selling their shares at the first hint of a significant capital gain. This quick selling creates herd behaviour and significantly impacts market volatility. For instance, in the case of Paytm, there was excessive optimism during the subscription period, which led to aggressive selling on the listing day and reduced the price. Conversely, domestic and foreign investors often refrain from making hasty exits, which leads to more stable post-listing prices with strong institutional backing, as seen in companies such as Nykaa. This kind of pattern reflects contrasting levels of financial discipline and investment timeframes among different investor groups.

Over time, the post-listing actions of investors continue to diverge. Retail investors, who are usually focused on short-term gains, often hop from one IPO to another in the hope of rapid gains, frequently overlooking fundamentally strong firms in favour of speculative ones. Domestic institutions tend to follow an accumulation pattern that helps them increase their shareholding in financially strong companies after price corrections. Foreign investors usually adopt a strategy of staggered entry, wherein they increase their investments only after observing consistent quarterly results, strong governance, and alignment with global market trends. These kinds of differences in approach help create a unique mix of volatility and resilience in Indian markets.

Behavioural Factors Influencing Investors

The behavioural contrasts between domestic and foreign investors can be explained through strategic and behavioural factors. Domestic retail investors usually succumb to herd behaviour, wherein they are influenced by media reports, social media excitement, and grey market trends. Their choices are often driven by familiarity bias, overconfidence, and past experiences (Chandra, 2021). In contrast, foreign investors and domestic institutional investors usually rely on financial expertise, past performance, and risk-adjusted return frameworks. This reflects differing levels of access to research, financial knowledge, and investment time horizons.

As India aims to strengthen its position in the global IPO market, major policy recommendations emerge. Improving retail investor education is crucial to ensure that participation is guided by research and expertise rather than speculation. Offering incentives for long-term investing could help reduce post-listing volatility, while stricter norms for monitoring grey market activities may help limit speculative distortions. Institutional participation should also be encouraged in mid-size IPOs, as it would assist in stabilising subscription patterns and improving price discovery.

Conclusion

The differences in behavioural patterns between domestic and foreign investors in the Indian IPO market are shaped by complex interactions of risk preferences, motivations, regulatory factors, and psychological influences. Domestic retail investors usually dominate subscription volumes through speculation, while domestic institutional investors contribute stability and fundamental analysis to the IPO market. Foreign investors provide long-term capital and emphasise governance and global trends. At the same time, regulatory reforms have opened up the IPO market to a larger group of investors, increased transparency, and safeguarded investor interests. Oversubscribed IPOs can cause spillover effects in the stock market, driven by liquidity reallocations and short-term gains. As India evolves into a global IPO hub, it is important to recognise these behavioural dynamics in order to design effective policies and foster a balanced IPO ecosystem.