The promoters had reportedly acquired shares just two or three months earlier at roughly one-eighth the valuation they were now asking public investors to pay. The company had been a perpetual lossmaker, but miraculously turned profitable this year due to a non-cash, one-time accounting entry. The outrage was swift and predictable.
The IPO looks overpriced by any reasonable measure. I personally find such public offers unattractive and generally caution retail investors against them. The gap between what insiders paid recently and what they are asking the public to pay is particularly galling.
When you combine that with a business that has never demonstrated the ability to make consistent profits, you have all the ingredients of a wealth transfer from naive investors to savvy promoters and early backers. Of course, this is not just about Lenskart; a whole queue of such IPOs is lined up behind it.
But here’s where I part ways with much of the commentary: a significant portion of the outrage has been directed at the Securities and Exchange Board of India (Sebi) for allowing such an IPO to proceed. The recurring theme is that the regulator is being negligent, that it should protect investors from these predatory offerings, and that it must prevent companies from entering the market at unrealistic valuations.
This line of thinking is fundamentally misguided. It represents a dangerous confusion about what market regulation should actually do.
The top job
Sebi’s job is to ensure transparency and enforce legal compliance. The regulator must ensure that companies disclose all material information accurately, that the IPO process follows prescribed procedures, and that there is no fraudulent activity.
If Lenskart has disclosed recent promoter transactions, explained its financials properly in the prospectus, and complied with all legal requirements, then that job is done. Whether the IPO is a good investment or a terrible one should not be the regulator’s concern.
The alternative is far worse than people seem to realise. If we want Sebi to act as an investment advisor, approving only “good” IPOs and rejecting “bad” ones, we are essentially asking the regulator to replace market judgment with bureaucratic wisdom.
Who decides what valuation is reasonable? Should Sebi have a price-to-earnings cap? Should it mandate a profit margin? These would be arbitrary rules that stifle market functioning rather than improve it.
The information we need to judge Lenskart’s IPO is available. The recent promoter transactions are disclosed. The financial history is there in the prospectus. The business model is explained. If, armed with all this information, some investors believe they can make money from this IPO, that is their choice. They may turn out to be right or wrong, but it remains their decision
This represents enormous progress from where we were. Those who remember the IPO manias of the 1980s and 1990s will recall a very different landscape. Back then, companies would simply lie in their prospectuses. Promoters would fabricate financial statements, make impossible promises, collect money, and disappear.
The problem wasn’t just bad investments; it was outright fraud on a massive scale. Parliament even set up a committee to look into these “disappearing companies.” That was a genuine regulatory failure.
We have come a long way from those dark days. Today’s IPOs, however overpriced they might be, operate in a framework of enforced transparency. The information is disclosed, the processes are followed, and the companies are real entities that will continue to exist after the IPO.
Investors can see what they are buying, even if they choose not to look closely enough. Some people expect full-time handholding by Sebi. They want the regulator to protect them not just from fraud and opacity but from their own poor judgment. This is both impossible and undesirable.
Markets function because people are free to make their own decisions based on available information. Some will make good decisions, others will make bad ones. That is how price discovery works, how market efficiency emerges, and how investors learn.
If you find an IPO unattractive, don’t invest in it. Personally, I have often argued that IPOs are rarely suitable for retail investors. But I don’t expect the regulator to prevent other people from making investments I wouldn’t make.
We need transparent and well-functioning markets, not a nanny who decides which investments are acceptable and which are not. The freedom to make good investment decisions necessarily includes the freedom to make bad ones.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm
