#1. Business Model

NSE is a network-effects business, and instead of my explaining the term, interested readers should read What is a Network Effect. In terms of business attributes, NSE has held a near-monopoly in the F&O (Futures & Options) segment — dominant, though not uncontested, as the Risks subsection below covers.

Trading on NSE was officially launched on the Diwali Muhurat day (the truncated session during Diwali) in 1994, and was restricted to a small group of only 30 scrips. Most readers do not have the whole picture since it is almost 32 years since trading commenced on NSE. Before the advent of NSE we had only one stock exchange — the Bombay Stock Exchange (BSE). One of the restrictions built into BSE’s operating model in those days was that its floor-based, open-outcry trading system was physically tied to Dalal Street in Mumbai; brokers had to be present on the floor, and BSE could not extend its trading network beyond the geographical limits of Mumbai. NSE, on the other hand, was formed with no such restriction. BSE was not screen-based; NSE came in with VSAT technology and revolutionised the way trades were executed. Very soon, NSE was nationwide. BSE had to wait it out — BSE launched its own electronic trading system (BOLT) in March 1995, and was progressively allowed to extend BOLT terminals outside Mumbai from around 1997 onwards, but by that time NSE was already entrenched as the dominant nationwide exchange.

The disruption in the stock-exchange business model was what NSE brought about.

For an extended period post launch, executing trades on NSE was not comparable in any shape or form to trade execution on BSE. Remember — F&O as a market segment did not exist in those days. In other words, NSE gave investors a CHOICE. Investors embraced the choice wholeheartedly. The late R.H. Patil was single-handedly responsible for this achievement during his stint at NSE.

As of today, investors can place cash-market trades on either NSE or BSE — it is a duopoly. In the F&O segment, NSE has been the dominant exchange — historically a near-monopoly, though as the Risks section below covers, BSE has taken meaningful derivatives share since 2023. Even so, NSE remains the dominant F&O exchange by a wide margin. Like all such businesses, NSE is an excellent business, no arguments at all.

NSE’s DRHP lays out the roadmap for listing. NSE will be listed on and traded on BSE — NSE cannot list on its own platform; the meta-circularity is also a literal infrastructure constraint. Similarly, shares of BSE are listed but they do not trade on the Bombay Stock Exchange — they trade on NSE; vice-versa for NSE.

One more thing before moving to the OFS mechanics. NSE has two other revenue streams beyond transaction charges that deserve mention, because they are the reason a genuinely long-term holder might own the stock at almost any price — provided the horizon is forever. NSE Indices Limited (NIL) — formerly IISL, the S&P joint venture NSE has since bought out — owns and licenses the Nifty family. Every ETF, index fund, and derivatives contract referencing a Nifty index pays a licensing fee. This is passive-investing coupon — it compounds with AUM in Nifty products and grows independent of daily trading volume. NSE Data Services — the market-feed business — sells real-time and historical data to institutional subscribers, terminal providers, and algo/HFT shops. Together the data and index franchise is perhaps 8-12% of NSE’s top line today, but it is the highest-quality revenue NSE has: recurring, high-margin, and structurally decoupled from trade volume. Over a horizon measured in decades — the only horizon that lets you ignore entry price — the data franchise is the compounding machine buried inside the exchange.

Here, the Klarman line matters:

“Market participants do not wear badges that identify them as investors or speculators. It is sometimes difficult to tell the two apart without studying their behavior at length. Examining what they own is not a giveaway, for any security can be owned by investors, speculators, or both.” — Seth Klarman, Margin of Safety.

What separates the holder for whom price does not matter from the holder for whom it does is not the security they own; it is the horizon they hold it over. If your horizon truly is forever, the Nifty franchise is the reason to own NSE at any price. If it is not, we are having a different conversation — and the rest of this post is that conversation.

#Risks

Any responsible business analysis has to name what could go wrong. NSE has real risks, and the biggest one is not the one that retail commentary tends to focus on. In descending order of materiality:

1. Option-volume regulatory risk — the largest single exposure. Roughly 70% of NSE’s revenue is F&O, and within that, index options — specifically weekly Nifty and Bank Nifty options — do the heavy lifting. These are the products retail has been trading at scale since 2020. SEBI’s September 2024 study on individual traders in the equity F&O segment found that a large majority of retail participants lose money. The regulatory response is already in motion: expanded lot sizes, one-weekly-expiry-per-exchange, tighter margin norms, and continued signalling from the current SEBI chair Tuhin Kanta Pandey that retail speculation is not something the regulator will sit still on. Every incremental rule tightens the option-volume base that today underwrites NSE’s earnings. A meaningful compression is not a tail risk — it is a working assumption for any honest analysis.

2. Competitive risk from BSE — demonstrated, not theoretical. The 2023-2025 period showed how quickly the derivatives market can shift when regulatory posture changes. Under the previous SEBI chair (Madhabi Puri Buch), a series of rule changes — the one-weekly-expiry-per-exchange mandate, brokers being required to register clients on both exchanges by default, and differential treatment on lot sizes — moved BSE’s derivatives market share from single digits to roughly 22% by early 2025, largely on the back of Sensex weekly expiry becoming a real alternative to Bank Nifty. NSE’s counter-move in February 2025 — shifting Nifty expiry to Monday, ahead of BSE’s Tuesday — is a defensive play, not a durable moat. The point is not about which exchange wins any given quarter. The point is that regulatory posture changes, and when it does, a duopoly’s economics can shift by tens of percentage points in a matter of months.

3. Governance and legacy overhang. The ₹1,300 crore co-location settlement of January 2026 is closed with SEBI, but civil litigation from broker-plaintiffs continues, and the reputational overhang from the Chitra Ramkrishna / Anand Subramanian era has not fully cleared. Any adverse ruling or fresh SEBI enforcement action against NSE would compress the multiple immediately.

4. Nifty-franchise substitution risk. The compounding index-licensing revenue identified in the paragraph above is not indestructible. MSCI and S&P already run competing India indices for global institutional investors. Domestic passive flow is captive to Nifty for now, but a shift by even one large domestic asset manager to a non-NSE benchmark would trim NIL’s revenue stream at the margin.

5. Technology and infrastructure risk. The 2015-2017 co-location episode was an infrastructure-level failure with regulatory consequences NSE is still paying for. Any recurrence of preferential access, tick-latency arbitrage, or system failure would invite immediate SEBI action.

The concentrated risk is (1) — the option-volume regulatory arc. The most under-appreciated risk is (2) — the demonstrated speed at which regulatory posture can shift a duopoly’s economics. Neither is priced into a 48x multiple.

#2. OFS versus Fresh Issue — what the words actually mean

Equity is ownership capital. Permanent — no repayment, no maturity, no contractual return. The IPO is the top of the funnel — the primary mechanism by which equity ownership in a company gets created. In that sense the IPO is a necessity in the world of equity investing, for everything downstream “to work.”

A fresh issue creates new shares. The company prints equity it did not previously have, the cash hits the operating account, and the balance sheet acquires new permanent capital. It is forward-looking. The price the buyer pays funds the things the prospectus promises.

An OFS — Offer for Sale — does none of that. Existing shareholders sell existing shares. No new equity is created. The cash goes to the seller’s bank account. The operating company receives ₹0. It is backward-looking. The price the buyer pays funds the seller’s exit. NSE is an Offer For Sale of existing shares by incumbent shareholders.

The OFS seller prices their sale to willingness-to-pay — the only way the potential buyer makes money in any OFS is if the strike was set below the post-listing equilibrium. The structure of any OFS is designed to prevent that from happening. Contrast that with a business that is not sold as an OFS. The fresh-issue company is not optimising exit; it is raising capital it wants to put to work, with promoters still inside the company on Day One. The two sellers are not playing the same game.

NSE will be the largest mainboard OFS in Indian history — roughly 3.5x Hexaware. ~₹30,000 crore to ten financial institutions. The operating company — NSE — receives nothing.

Aswath Damodaran, the valuation guru, has a line worth carrying through this whole post: don’t mistake pricing for valuation. Pricing is what the next buyer will pay; valuation is what the asset is worth. Any OFS structurally does exactly what Damodaran warns against — it sets the strike at the upper edge of willingness-to-pay, and asks the retail subscriber to read that strike as if it were the company’s value. I think this is lost on most investors. Does it matter? The short answer is that it absolutely does. For those of you who think of any new listing solely from the point of view of the listing pop, then you are probably reading the wrong blog. There is nothing wrong about the listing-pop mechanism — but don’t call yourself an investor.

The eagerness to participate in the NSE OFS is, in one word, EPIC — and rightly so. NSE is as close to a sure thing as investors can aspire for. Hence all of us want to invest in it. Truth be told, NSE did make a virtue out of a necessity — it absolutely did, no doubt about it. Pre-NSE, things were so different that most readers will find them unbelievable.

Necessity and virtue are different categories. A road, a port, a stock exchange — necessary, none of them virtuous. The market structure surrounding any of them can be well-designed or badly designed, fairly priced or extractive; the underlying transaction-clearing work is the same in either case. The market structure is what is open to moral evaluation. The mechanism is not. The most honourable explanation is: NSE is a natural evolution of how things tend to happen.

#3. Investing in the NSE OFS — the Mode Error

All of us are susceptible to what is called a mode error.

Mode Error: When a device has different states (modes) where the same controls have different meanings, and the user believes the system is in one mode when it is actually in another.

NSE (2026) is not the same animal as NSE (1994). What the late R.H. Patil ushered in was certainly a virtuous business. How virtuous is NSE (2026) compared with NSE (1994)? The short answer is: it is not. For those of you who are investing in the true sense, and who are thinking that NSE is very virtuous, I urge you to think again.

#4. How to think about NSE (2026) — Valuation Metrics

Any of us investing in any business defaults to thinking about — how much can I make when I actually put money to work in this game? If I were to invert the question and ask instead, how much can I lose?, it leads us to the more useful follow-up questions.

Valuation does matter, but it is just one of many things that do matter. Is NSE correctly valued at its OFS price? I’d rather leave the valuation argument to the pundits — not my bailiwick. What matters to us is our cost basis, and the entry point at which we invest.

Buffett’s 1986 tulip-bulb test is worth mentioning:

“If you could buy a company that owned twelve tulip bulbs for a 20% discount to the value of those tulip bulbs, would that be a bargain?”

In plain English, a discount from an irrationally high price is not value. The entry point matters more than most of us realise. And once we invest, we have zero control over what happens next. We do have an illusion of control when we stare at the price and watch it dance all over the place — but it is an illusion. Chuck Akre says it best:

Your starting price is the most important one and it is actually the ONLY thing that you can control. — Chuck Akre

The idea is to buy a business that is a compounding machine; the underlying business compounds at an above-average rate and the valuation re-rates higher. NSE has all the attributes of being such a business.

Investors tend to confuse VOLATILITY with RISK. Volatility isn’t the same as risk. The probability of permanent loss of capital — which is the defining feature of risk — is very low when one is investing in NSE. Businesses like NSE are rare. But let me reiterate: ‘the starting price has everything to do with your compound return.’ What the OFS price will do is anchor all of us, forever. How will it affect our compounded return? Only time will tell. But do remember — the entry price is part of the bet; a wonderful business at a rich price is a bad wager. NSE has already won the race with BSE; the question is, will it continue to win? The fact that it has won the race thus far is already reflected in the OFS price, isn’t it?

In monopoly-by-economics moats, profitability is decoupled from quality. Business quality and stock return are different things — price determines return, not quality. Never confuse “great company” with “great investment.” Underwrite the price, not just the franchise. Bottom line: an amazing business does not make for a good investment. Buffett says it best:

Buffett on newspaper monopolies: “there is no correlation between profits and excellence. You essentially have a business that will make a lot of money if you’re terrific [and] it will make a lot of money if you’re lousy. There’s no difference. You pick a paper that you tell me you think is lousy and I will show you one with 30% profit margins.”

Howard Marks draws the sharpest bright line in the value-investor tradition — which assets can you NOT value analytically? Marks’s answer: “assets that throw off no cash flow — diamonds, furs, paintings, a barrel of oil, gold, and Bitcoin. If something doesn’t throw off cash flow, you can’t say what the fair value is.” The mechanism is arithmetic — intrinsic value is the discounted lifetime cash stream; with no stream there is no computable fair value, so any purchase is driven by price expectation and FOMO, not analysis. “You can’t justify it analytically.”

NSE is a cash-flow business — F&O fees, listing fees, data revenue — and sits squarely on the analysable side of Marks’s line. But even a cash-flow asset gets pushed to the speculative side when the market price runs so far ahead of the discounted-cash-flow math that no reasonable growth assumption bridges the gap. At ~48x trailing earnings on a declining base, the buyer is no longer paying for cash flow — the buyer is paying for the price expectation. Marks’s bright line runs through NSE not because it lacks cash flow, but because the OFS band puts the pricing on the wrong side of it.

#5. Follow the Money

Before the Follow the Money questions, a note on method. Any company analysis worth doing has to pass a general-semantics sanity check — Alfred Korzybski’s frame for keeping thought accountable to what actually exists. Five steps:

1. What does this specific company actually do? (extensional — describe the object, not the category)
2. How has it changed since the last time I looked? (dating — the analysis I ran in 1994 is not the analysis that applies in 2026)
3. How does it differ from peers? (indexing — NSE₁ ≠ NSE₂; NSE ≠ BSE ≠ MCX ≠ CME)
4. What am I inferring versus what am I observing? (the single most dangerous step — inferences carried forward without being re-observed become dogma)
5. What environmental factors affect this business right now? (chain indexing — the macro, regulatory, and competitive context is not the same context as ten years ago)

The mode-error argument in §3 above is Korzybski’s step 4 gone wrong: an inference (“NSE = virtuous disruptor”) drawn in 1994 and carried into 2026 without being re-observed. Most of what passes for company analysis in Indian public markets is dated inference — the argument that NSE is a wonderful business is not wrong today, but the analysis saying so is often the one somebody ran a decade ago and never updated. That is why the questions that follow are worth asking now.

These are the questions I am asking:

• Who is selling and what will they do with the moolah? We don’t know where the money is going, do we?
• What does NSE do with the cash the business (not the OFS) generates? Fact is that NSE is going to gush cash any which way. What is it going to do with the cash? The prospectus is silent on that. Will it return it to us in the form of dividends?
• What does NSE do for its customers — the common investor? It pretends to be virtuous — is it? We shouldn’t be looking only at historical figures; we have to look ahead. How much can NSE as a business GROW from here? NSE was virtuous — is it as on date?

Let me try and make an educated guess at the answers:

• The structure of any OFS is such that NSE as a business gets exactly zero from the OFS proceeds.
• What are the two general sources of return from any business?
  1. Existing cash flows — what the business generates today.
  2. Potential future cash flows — growth. NSE’s growth from the OFS price is not a given either. It is so heavily regulated and constrained, I would not hazard a guess. These businesses are heavily dependent on market sentiment, global flow of funds, politics and macro-economics. Not my shtick since there is too much forecasting involved. People commonly conflate a business’s actual return with its growth. If you don’t think there is much growth, the existing cash flows have to support the valuation — which just means you pay a lower price. Growth and return are two separate things; we shouldn’t conflate them. A good company could be a bad stock and vice versa.
• Is NSE a PSU? No. NSE is a private limited company incorporated on 27 November 1992. Its founding shareholders were public-sector-adjacent financial institutions — IDBI, ICICI, LIC, GIC, IFCI and others — but the exchange itself is not classified as a Public Sector Undertaking. The government does not hold a direct equity stake in NSE, and NSE is not subject to the CPSE governance framework applicable to PSUs. Post-OFS, the largest single shareholder will remain LIC (~10.72%), but the shareholding is widely dispersed across public-sector institutions, foreign investors, and private financial holders.

The reality is that NSE is today a bureaucratic mess — which surfaces the Munger line:

Munger (USC Law, 2007): “Complex bureaucratic procedure does not represent the highest form civilization can reach.” He also says: “A seamless, non-bureaucratic web of deserved trust.” His test: “If your proposed marriage contract has 47 pages, my suggestion is that you not enter.”

Does NSE qualify? I think not — not even close. As of today, NSE and BSE are just extended arms of SEBI; they might as well merge all of them. What SEBI, and by extension NSE and BSE, aspire to do is to control market direction and price discovery. It is lost on them that neither of these two things is part of their mandate.

#6. A decade of OFS — let the buyer be aware

Twenty-five mainboard IPOs from late 2010 to early 2025. Fourteen OFS-heavy, ten fresh-heavy. The tables below are the dataset. The analysis is short. We present the receipt; you decide.

Table 1 — OFS-heavy IPOs, 2010–2025 (14 issuers)

Table 2 — Fresh-issue-heavy IPOs (10 issuers)

Table 3 — Cohort comparison (mid-June 2026)

Three observations.

The listing-day pop gap is the cleanest single signal in the dataset. Median OFS pop, +8%. Median fresh pop, +66%. Eight times wider on fresh. OFS sellers price for willingness-to-pay; fresh-issue companies leave money on the table because their interests don’t terminate at the listing — the promoter is still inside the company on Day One; the OFS seller, often, is not. The gap is the gap between two incentive structures, sitting in plain numbers.

The single-IPO rule “OFS underperforms” fails honestly. HDFC AMC compounded +138%. Mankind Pharma +124%. Vijaya Diagnostic +139%. Coal India +86% on price alone — materially more on dividend total return. All four were pure OFS. Franchise quality matters. The market structure does not help the retail allocator distinguish HDFC AMC from Paytm at the IPO desk — same Schedule XIII machinery, same financial sellers, same willingness-to-pay pricing. One compounded. One is half its issue price. The structure was the same. The franchise was not.

Mega-OFS at peak demand: five out of five underwater or flat. LIC −53%. Paytm −49%. Hyundai India flat. Star Health −37%. Bajaj Housing +22% vs issue, roughly halved from listing close. The 2021–2024 peak-demand mega-OFS cohort is unanimous. NSE at ~₹30,000 crore would be the largest entry in it.

#7. Three things the data does not say

I am not building a single-variable predictor here. The OFS-versus-fresh split is the cleanest signal of how the market structure is pricing the transaction. It is not a complete predictor of how the investment ends.

It does not say “OFS predicts failure.” HDFC AMC and Mankind compounded for the patient buyer. Coal India’s total return including fifteen years of dividends is materially higher than the price column above suggests. Vijaya Diagnostic delivered. The market structure does not stop a good business from being a good business — it just doesn’t help the retail allocator find it among the queue.

It does not say “fresh-issue protects you.” Ola Electric −44%. MobiKwik −29% from issue, more than halved from listing close. NTPC Green −10%. Burger King India — Restaurant Brands Asia — ~49% below listing close. Fresh capital, into the operating company, did not fix the unit economics in any of them. The fresh-issue structure is not the business-quality solution.

It does not say “the market structure critique is a fresh-vs-OFS critique.” The Schedule XIII discretion, the 20-BRLM syndicate structure, and the regulatory accommodation immediately preceding any large filing all cut across issue types. The OFS-vs-fresh axis is the cleanest signal. It is not the only test the market structure has to pass.

The biggest confounder is vintage and sector. The 2021 cohort listed at peak post-COVID liquidity; the 2024 into a correction. The post-listing return depends on franchise quality, vintage, and the price the band was set at — none of which retail has informational leverage on at the IPO desk.

#8. Global Valuations of similar businesses

#Comparable listed bourses — what the float looks like now, and what it matures into

Two Indian bourses are already listed: BSE (listed February 2017, ~9 years) and MCX (listed March 2012, ~14 years). Both started as institutionally concentrated demutualised exchanges. Both demonstrate what a decade of secondary-market evolution does to the shareholding pattern — and they have diverged sharply. The DRHP discloses NSE’s post-issue pattern (per ICDR Reg 24); the comparable listed exchanges’ patterns are public as of their most recent quarterly disclosures.

Table A — Shareholding pattern: NSE projected post-IPO vs BSE current vs MCX current

Three observations.

Both BSE and MCX list with zero promoter — and NSE will too. This is the demutualised-exchange model. The post-listing market has to set price discovery without a controlling block to anchor it.

BSE has matured into retail dominance (~64%) over nine years. From a 2017 listing-day profile that would have looked closer to NSE’s projected starting point, BSE’s float has progressively redistributed to individual investors. The path: institutional sellers trim into a willing retail bid as the post-listing multiple compresses to global-comparable levels.

MCX has gone the opposite direction. Domestic institutions hold 54%, foreign institutions another 26% — combined ~80% institutional. Retail at 15%. The 2013 NSEL crisis forced the original promoter (FTIL, now 63 Moons) below 2%; the float was rebuilt by institutional buyers, not retail. The structural lesson: there is no automatic retail-accumulation path. Whether it happens depends on the multiple at which the stock trades over the cycle and whether retail finds the franchise attractive at those prices.

NSE’s likely path is between the two. Higher F&O concentration than BSE (which is cash-heavy) and a thinner moat than MCX (which has commodities exclusivity). The realistic 10-year shape — and the question the patient retail buyer must answer at the IPO desk — is whether the stock’s institutional concentration relaxes through retail accumulation (the BSE path) or holds through institutional dominance (the MCX path). Neither path validates paying ~48x today.

#Implied valuation against the global cohort

NSE’s implied issue valuation is ~₹5 lakh crore (~$60 billion at current FX). Against FY26 PAT of ₹10,302.6 crore (down 15.5% YoY from FY25’s ₹12,188 crore; revenue ₹16,601 crore, down 3.1% from ₹17,141 crore — per DRHP press extracts), the implied trailing P/E is approximately 48x.

For context on the operating quality of the business: NSE reported an Operating EBITDA margin of ~67%, a PAT margin of ~56%, and a Return on Equity of ~33% in FY26. These are exceptional margins by any global exchange standard. The valuation question is not about the quality of the underlying business — it is about the price being paid for it.

Listed exchange operators globally trade in a band of ~16-38x trailing earnings. The comparable cohort, in USD.

Table B — Global listed exchange operators (mid-2026, USD basis)

The developed-market cohort median is ~22x trailing earnings; the top of the developed band is LSE Group at ~36x. NSE would list at roughly 2.2x the developed-market median, ~1.3x the top of the developed band (LSE), and ~3.4x the closest EM comparable (B3, Brazil).

The honest defence of the premium has three legs — Indian retail derivatives volume growth, NSE’s near-monopoly position in F&O, and the listed-exchange scarcity premium on Indian markets. The honest critique has three legs of its own. One, ~70%+ of NSE’s revenue is F&O-driven, and SEBI is the same regulator that has been rewriting F&O rules through 2024-25 with more changes signalled. Two, FY26 financials are already declining — revenue down 3.1% and PAT down 15.5% YoY — so even the 48x multiple is on a base that is not growing. Three, no listed exchange globally trades meaningfully above ~36x today; the comparable cohort says the premium beyond ~30-36x has not historically held.

#Capital structure and float — what actually trades, and when

NSE’s post-issue paid-up base is 248.18 crore shares. The OFS sells 14.89 crore shares to the public — exactly 6.0% of paid-up capital. There is no fresh issue. The paid-up number does not change.

The 6.0% headline is a cap-table number. The actual tradeable float at any given moment depends on what is locked, and for how long. ICDR Schedule XIII locks the anchor allocation in two tranches — 50% for 30 days, 50% for 90 days. Reg 17(b) locks the rest of the pre-issue capital — held by non-OFS-selling pre-issue shareholders — for six months from listing.

Table C — Free float by lock-in stage

For the first six months NSE will trade as a 4-6% float stock — among the thinnest of any Indian mainboard at its valuation. Price discovery in that window is institutionally dominated and structurally volatile. At Day 180 the entire ~233 crore non-OFS-sold pre-issue base becomes eligible to trade. Eligible is not the same as selling. The ~24.81% combined held by sophisticated long-term non-sellers identified in §9 below — LIC, SBI Capital Markets, Mahogany, Premji Invest, R.K. Damani and others — will likely stay put. The remainder, ~70% of paid-up held by 250+ smaller pre-issue holders, is the latent supply that determines what “wait for a better price” can actually mean for the retail buyer.

#How the post-listing trade looks

Cross-reference the float table and the valuation table. NSE will trade as a thinly-floated ~48x P/E exchange against a global cohort of 16-36x more-liquid comparable global exchanges. Every prior mega-OFS at peak demand in the §6 dataset — LIC, Paytm, Hyundai, Star Health, Bajaj Housing — is currently underwater or flat. Mr. Market does not historically wait long, on this kind of setup, to deliver a wait-for-a-better-price window. The patient retail buyer’s question is not whether the window comes. It is whether the price the IPO desk wants today needs to be paid today.

#9. NSE — the architect itself

100% OFS. ~₹30,000 crore. 14,89,05,525 shares — about 6% of paid-up capital, implied valuation in the neighbourhood of ₹5 lakh crore. Pure exit transaction; the operating company receives ₹0.

Ten selling shareholders — SBI the largest at 2.47 crore shares, CPPIB next at 1.187 crore (i.e. ~11.87 million; press extracts of the DRHP have been mis-stating this as 1.87 cr), with Morgan Stanley Strategic (Mauritius), Bank of Baroda and five public-sector insurance / custodian entities behind them. State-side, foreign-PE-side, insurance-side — a coordinated exit. Laid out side by side:

Table D — NSE OFS selling shareholders

One detail in the table worth pausing on. MS Strategic (Mauritius) Limited — the third-largest selling shareholder by share count — is an associate of Morgan Stanley (per the DRHP shareholding extract reproduced by Business Standard). Morgan Stanley India Company sits in the 20-BRLM syndicate as one of the book-running lead managers. The Morgan Stanley group, in other words, is on both sides of the issue — one group entity assembling the order book and parcelling out the anchor allocation under Schedule XIII discretion, another group entity taking cash off the table as a selling shareholder. Standard Chinese walls between investment-banking and proprietary holdings exist; they do not change the structural observation that the same corporate group is on both sides of the transaction. Schedule XIII’s “the lead manager picks which anchors get allocated” problem is not a hypothetical. In this issue, one of the group’s units is picking, while another of the group’s units is being paid.

The analogy that fits is one Richard H. Lawrence Jr. drew thirty years ago, in a different corner of Asian finance.

Lawrence ran Overlook Investments out of Hong Kong for thirty-seven years; he tells a story in The Model about a security-analyst luncheon at the Hilton on Queen’s Road Central in the early 1990s. At his table sat the Managing Director of Hong Kong’s largest asset manager. The conversation turned to soft-dollar brokerage fees — a practice then under investigation in the HK investment-management community. The MD spoke in defence of soft-dollar commissions. Lawrence’s reading, recorded years later:

“Soft dollar brokerage fees, in my view, are just stealing from one’s clients. I called him out on it. He shrugged as if to say, ‘Let’s agree to disagree.’ He and his firm fell in my esteem.”

The Morgan Stanley arrangement in NSE’s DRHP is not a soft-dollar transaction. But Lawrence’s structural argument — “a blatant conflict of interest that must be eliminated” — applies word-for-word: one corporate group benefits while the cost is borne by the people not at the table, and the industry’s response is the Chinese-walls equivalent of “let’s agree to disagree.”

(One more table-level note worth flagging: Aranda Investments (Mauritius) is Temasek’s vehicle; the 4.54% pre-IPO stake places Temasek as the second-largest single holder of NSE after LIC — and Temasek is choosing to trim only ~10% of that stake.)

None of the ten selling shareholders is doing a Hexaware-style 100% exit. Every one of them is partial-exit OFS — they reduce, they do not leave. The stake they retain is the bet they have not sold to the retail subscriber. It is a trim, not a liquidation — and the market structure rewards the trim because the seller keeps optionality on the residual while taking cash on the slice. The “% of own stake sold” column tells the story in one number: the diversified financial-institution holders trim between 10% and 31% of their position. No-one liquidates.

LIC — the single largest NSE shareholder at 10.72% — is not selling. The largest insider holds. The other ten cash out — partially. The people not selling believe the news is not yet priced. The people trimming believe it is. Retail is being asked to take the opposite side of the trade the ten trimmers are putting on.

The mirror observation matters. LIC at 10.72% is not the only sophisticated long-term holder choosing to retain its stake. Premji Invest, R.K. Damani, Mahogany Ltd, Crown Capital, DVI Fund, TIMF Holdings, and Oriental Insurance — each holding between 1.42% and 3.73% — also abstain from the OFS. So does SBI Capital Markets at 4.33%. These are the holders who, applying the expectation-in-the-price test, do not believe the news has yet been priced in. The selling shareholders — the diversified financial-institution holders trimming 10–30% of their stake — disagree.

What would change this pattern is what Charlie Munger named in 2012: “If we change the incentives, a lot of this regrettable behavior would go away.” The market structure rewards what it measures. Right now it measures listing-day pop, anchor-day strike, and OFS clear-out. All three are short-term. All three pay the seller, the lead manager, and the flipping anchor. None pays the retail subscriber for holding the asset the market structure was supposedly built for.

Munger had a counter-warning in the same talk worth carrying alongside: once the wrong culture gets entrenched, it builds political power that protects the regrettable activities themselves. On 13 March 2026 SEBI gazette-notified a change to the minimum-public-offer rule — the dilution floor dropped from 10% to 2.5% for issuers above ₹5 lakh crore in valuation. The market structure made the door narrower exactly where the largest issuers needed it narrower.

A note on register. This is not a hostile-to-NSE post. The single largest reason a retail investor in 2026 even has the architectural choice of an IPO on a market-cleared screen is NSE itself. The political will to create a new exchange came from SEBI and the Finance Ministry in 1992-93 — a deliberate move to break the open-outcry cartel BSE had run since 1875. The architectural design came from the late R.H. Patil — screen-based, anonymous, nationwide; India’s first instance of an architect giving the small investor a structurally fair quote-driven order book. NSE wasn’t a better version of BSE; it was a different architecture. Retail in 1996 didn’t have to compare the two — they had a genuinely better choice. The fact that you can read a critique like this one, and trade on a screen as you do it, is the Patil-era legacy.

The point of recalling that history is precise. NSE proved that architectural choice, delivered by the architect, is what shifts retail’s structural position. The self-belief of a pioneer is a powerful thing — and normally, when the experts propose untested solutions, they are not the ones who suffer the consequences. Patil’s architecture was untested in India in 1992; had it failed, the consequence would have been his. SEBI is sitting in the same chair the 1992 SEBI sat in. The question is whether it will use it.

#The bottom line for the buy-and-hold reader

All of this reduces to one question the buy-and-hold reader of this post has to answer. The entry price is the bet — the only part of the bet you actually control. NSE is a wonderful business; but a wonderful business at a rich price is a bad wager, and the decade of receipts (§6) says Mr Market will offer you the same franchise at a fairer price within twelve months of listing on the pattern above. The patient owner’s discipline — denied at the IPO desk, restored by the secondary market — is either the discipline you will apply, or the one you will regret not having. Chuck Akre’s line, one more time: the starting price is the ONLY thing you can control.

#Conclusion

What about the listing pop? Investors will flock to this issue. The anticipation is built up — big time. It is clearly the most awaited listing ever. Most of us perceive it as close to a sure thing as one can get. Two things are virtually certain: (a) the issue will attract record oversubscription; and (b) there will be a listing pop — the quantum is not certain, only that there will be one. SEBI and the Ministry of Finance have engineered exactly that outcome, constructing a convoluted market structure that manufactures scarcity of floating stock. I wrote about that engineering in When The Ducks Are Quacking… Feed Them! — the deeper structural argument sits there.

Joseph de la Vega understood what the trading floor was, in Amsterdam in 1688, when he wrote Confusion of Confusions — the first book ever written about a stock exchange. One observation in it has not been improved on in three centuries: “the expectation of an event creates a much deeper impression… than the event itself.” He went on: “when expectation becomes a reality, the shares often fall.” That is the oldest observation in capital markets — the description of what the floor does, not the virtue it serves. India’s IPO market structure has industrialised the observation and marketed the industrialisation as virtue. NSE together with SEBI sound more like the adage ‘the inmates are running the prison’ — they really are.

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#Notes on the data

• Dataset (§6). 25 mainboard IPOs listed on NSE/BSE between Nov 2010 (Coal India) and Feb 2025 (Hexaware). Cohort split by issue structure: OFS-heavy = OFS portion >50% of issue by value; fresh-heavy = fresh portion >50%. After reclassifying Devyani International (76% OFS) and Krsnaa Diagnostics (67% OFS) to the OFS side, and Bajaj Housing (54% fresh) to the fresh side, the working cohorts are 14 OFS-heavy and 10 fresh-heavy. Tatva Chintan (45% fresh / 55% OFS) is borderline and excluded from cohort medians.
• Sources — issue structure. Chittorgarh IPO database, one page per IPO (chittorgarh.com/ipo/...).
• Sources — prices. Listing-day and current-price data: Business Standard, BusinessToday, Tickertape, INDmoney, Trendlyne, Stock Analysis, Value Research, Screener — varies by IPO; cross-checked where possible. All “current” prices captured between 7 and 19 June 2026.
• Methodology. Returns are price-only — dividends, bonus issues, and stock splits are not included unless flagged. The biggest under-statements from this choice: Coal India (15 years of dividends materially higher than the +86% price column), HDFC AMC (dividend payout would lift the +138% number further), IRCTC (1:5 split in Aug 2021 — split-adjusted issue price ₹64 against current ~₹520, +62% is on a like-for-like price-only basis). Nykaa’s 5:1 bonus (Nov 2022) is split-adjusted in the current-price comparison.
• NSE DRHP status. Filed with SEBI on 17 June 2026. Filing facts in this post — selling-shareholder shares, BRLM list, allocation language, financials — are drawn from press extracts of the DRHP (Business Standard, Entrackr, IPO Ji, BizzBuzz, NewsX, Outlook Business, BusinessToday, Groww). The exact anchor-allocation language, the promoter classification, the lock-in schedule for pre-issue capital, and the price band are to be confirmed when the DRHP PDF appears on the SEBI portal. The implied valuation of ~₹5 lakh crore is a press-side estimate, not a DRHP statement.
• §9 Morgan Stanley group on both sides — provenance. MS Strategic (Mauritius) Limited is described as “an associate of Morgan Stanley” by Business Standard (Khushboo Tiwari, “NSE IPO windfall: Early institutional investors set for multifold gains,” 18 June 2026), citing the DRHP shareholding extract. The DRHP-cover BRLM list — confirmed in Business Standard’s 17 June filing report — names Morgan Stanley India Company as one of the 20 book-running lead managers. The body paragraph in §9 names the two entities as distinct legal vehicles under the same corporate group, and explicitly addresses the Chinese-walls defence. To be re-verified against the DRHP PDF when SEBI posts it on the public filings portal.
• §9 NSE selling-shareholder table — provenance. Pre-IPO stake percentages for seven of ten sellers — SBI 3.23%, CPPIB 1.60%, Aranda 4.54%, Stock Holding Corporation 4.44%, GIC Re 1.64%, New India Assurance 1.42%, National Insurance 1.42% — are taken from the DRHP shareholding-pattern extract reproduced in Business Standard’s “Damani to Dolly Khanna” piece on the NSE pre-IPO holder list. Three sellers — MS Strategic (Mauritius), Bank of Baroda, United India Insurance — remain [Not verified] at the stake-% level; their share-count contributions are confirmed but pre-issue % is not yet on press record. Non-seller holdings above 1% — LIC 10.72%, SBI Capital Markets 4.33%, Mahogany 3.73%, Premji Invest 2.35%, Crown Capital 2.07%, DVI Fund (Mauritius) 1.83%, TIMF Holdings 1.75%, R.K. Damani 1.58%, Oriental Insurance 1.42% — are from the same DRHP extract.
• R.H. Patil and NSE founding. Dr. Ramachandra H. Patil was NSE’s founding Managing Director (1993–2000), seconded from IDBI to lead the new exchange. NSE was incorporated in November 1992 by IDBI, ICICI, LIC, and other public-sector financial institutions under SEBI and Finance Ministry direction; the Capital Market segment launched in November 1994. Patil passed away in 2012; the obituary in Business Standard and successor MD Ravi Narain’s tribute both credit him as the principal architect of the screen-based, anonymous, nationwide design.
• §1 BSE nationwide-expansion date. BSE’s electronic trading system BOLT went live in March 1995. SEBI’s progressive relaxation of BOLT-terminal-outside-Mumbai restrictions began in the mid-1990s, with meaningful expansion from 1997 onwards. The exact SEBI notification date should be verified against the SEBI archives or BSE annual reports of 1996-97 before publish.
• §8 free-float math — assumptions. ICDR Schedule XIII anchor cap at 60% of QIB tranche; standard 50% / 50% anchor lock split at 30 and 90 days; SEBI ICDR Reg 17(b) six-month pre-issue lock-in for all non-OFS-selling pre-issue shareholders. Paid-up base of ~248.18 crore shares is the implied figure from OFS share-count (14.89 cr) at ~6% of paid-up. All numbers to be re-verified against the DRHP allocation language and capital-structure section when the PDF appears on the SEBI portal.
• §8 NSE FY26 financials — CONFIRMED. PAT of ₹10,302.6 crore (down 15.5% from FY25’s ₹12,188 crore); revenue ₹16,601.31 crore (down 3.1% from ₹17,141 crore). Operating EBITDA margin ~67%, PAT margin ~56%, ROE ~33%. Sourced from press extracts of the DRHP filed 17 June 2026 (BusinessToday, Groww, Upstox reporting). The decline is attributed to lower transaction-charge income and lower clearing/settlement income following moderation in trading activity, plus higher expenses and certain exceptional/regulatory items. Implied trailing P/E at ₹5 lakh crore = ~48x.
• §8 global exchange comparables — Table B. Market caps and trailing P/E ratios as of mid-2026, sourced from Yahoo Finance, MacroTrends, StockAnalysis, and companiesmarketcap.com for each exchange. Cross-verified where multiple sources available. B3 (Brazil) P/E not resolved in this pass; the ~14x figure is carried forward from prior public-comps aggregations and should be re-verified against Bloomberg / Reuters at final publish. ₹/$ FX assumed at ~₹83/$ for the ₹5L cr → $60B conversion — to be updated to spot at publish.
• §8 Table A — comparable bourse shareholding. BSE Limited and MCX (Multi Commodity Exchange of India Limited) quarterly shareholding patterns sourced from the most recent disclosures available on Trendlyne, Tijori Finance, MarketsMojo, Choice India, Angel One and Equitymaster aggregations as of Q4 FY26 (March 2026). NSE post-issue category-wise projection is an estimate built from the pre-IPO category split (per the March 31, 2026 disclosure: public 64.40%, non-public non-promoter 35.60%) plus the OFS allocation framework (QIB 50% / NII 15% / Retail 35%) — all NSE post-issue category figures to be verified against the DRHP capital-structure section once the PDF is on the SEBI portal.
• Red herring terminology. Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) are defined in Section 32 of the Companies Act 2013 and operationalised under SEBI ICDR Regulations 2018. The DRHP is filed with SEBI for observations; the RHP, filed later with the RoC at least three working days before issue opening, may omit the final price band. The term “red herring” derives from the red-ink disclaimer on US SEC preliminary prospectuses; India inherited the term from US securities-law practice. The colloquial English sense — a clue introduced to distract from the real issue — is unrelated in etymology but congruent in effect.
• NSE-as-PSU classification. NSE is a private limited company incorporated 27 November 1992. Its founding shareholders were public-sector-adjacent financial institutions (IDBI, ICICI, LIC, GIC, IFCI). The government does not hold a direct equity stake and NSE is not classified as a Central Public Sector Enterprise. Largest single shareholder remains LIC at 10.72%.
• CPPIB share count. The widely circulated press figure of 1.87 crore appears to be a digit transposition originating with Entrackr’s early extract; the DRHP figure is 1.187 crore (~11.87 million shares). Body text and table corrected. Total OFS still rounds to ~14.89 crore = ~6% of paid-up capital — the 6% framing is unchanged.
• Likely DRHP PDF URL. A 5paisa Substack post surfaces what appears to be the direct PDF link: https://nsearchives.nseindia.com//web/mediaattachment/2026-06/Reg_30_-_Filing_of_DRHP_20260617221330.pdf. Unverified — the URL was not independently confirmed and is not linked in the post body. To be verified against the SEBI public filings portal when the document appears there.
• SEBI Act 1992, Section 11(1). “Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.”
• Conceptual sources. Damodaran on pricing vs valuation (widely written; NYU Stern Investment Valuation franchise). Buffett tulip-bulb line from the 1986 Berkshire annual letter / Q&A. Buffett newspaper-monopoly line from a 1992 Omaha Press Club talk. Chuck Akre on the starting-price discipline from Akre Focus communications and interviews (widely quoted). Howard Marks’s “which assets can you NOT value analytically” framing and the cash-flow bright line from Marks’s Oaktree memos and Mastering the Market Cycle — the specific asset list (diamonds, furs, paintings, oil, gold, Bitcoin) is paraphrased across multiple Marks talks and Oaktree client letters. Seth Klarman’s investor-vs-speculator observation from Margin of Safety (1991), the chapter distinguishing the two by behaviour and horizon rather than by security selection. Alfred Korzybski’s general-semantics framework — extensional description, dating, indexing, inferring vs observing, chain indexing — from Science and Sanity (1933), applied here as a company-analysis lens (the operational language of the five steps is my paraphrase, not Korzybski’s original wording). Munger on bureaucracy from the 2007 USC Law School commencement address. de la Vega’s Confusion of Confusions (Amsterdam, 1688). Munger 2012 incentives + entrenchment line from the Daily Journal annual meeting. Lawrence’s soft-dollar luncheon anecdote from Richard H. Lawrence Jr., The Model: 37 Years Investing in Asian Equities.
• §1 NSE data + index business revenue mix. The “8-12% of top line” figure for combined data services + index licensing is from press extracts and pre-DRHP filings; the DRHP itself provides a segmental revenue breakdown that should be referenced when the PDF appears on the SEBI portal. Nifty franchise = NSE Indices Limited (NIL), formerly IISL (India Index Services & Products Ltd, the S&P joint venture NSE bought out — completion of full ownership on public record). NSE Data Services covers real-time market feeds, historical data, and vendor licensing (Bloomberg, Refinitiv, Iress redistribute NSE data). Colocation and connectivity are technically separate revenue lines and not included in the 8-12% figure.
• §1 Risks — 70% F&O concentration. The “~70% of NSE’s revenue is F&O, and within that, index options do the heavy lifting” figure comes from NSE’s own segmental disclosures across FY23-FY25 annual reports and press extracts of the DRHP. Within F&O, Nifty and Bank Nifty index options make up the dominant share by premium turnover — retail derivatives volume growth 2020-2024 was almost entirely in weekly index options. Precise breakdown to be verified against DRHP financial statements.
• §1 Risks — BSE competitive-share arc. The observation that BSE’s derivatives market share moved from single digits to ~22% under the previous SEBI chair (Madhabi Puri Buch, 2022-2025) is sourced from Palak Shah, “BSE: Will The Dream Run Continue?”, BW Businessworld, 20 March 2025, citing Nuvama Research and industry commentary from Rajesh Baheti (Crosseas Capital). The article documents the specific regulatory moves — one-weekly-expiry-per-exchange rule, forced broker-side dual-registration by default, differential lot sizes — and the post-Buch response (NSE’s Monday-expiry counter-shift, Feb 2025). Piece is from a BW Businessworld investigative journalist with a book (The Market Mafia) on Indian market regulatory dynamics.
• Caveats on the argument. The OFS-vs-fresh split is the cleanest single empirical signal in the dataset — not a forward predictor of any individual IPO’s return. Franchise quality, vintage, sector, and band-setting discipline matter more than structure in isolation. The argument is about how the market structure prices the transaction, not a deterministic claim on how it ends.
• Heretical aside — the SECC fit-and-proper note on BSE’s ticker. Pull up BSE Ltd on the exchange’s own quote page and you’ll find, under the price line, a note in alarmed red: “The share of the listed stock exchange shall only be dealt by fit and proper persons as per regulation 19 and 20 of SECC Regulations.” Read literally, it warns the retail investor buying a hundred shares that they had better be of good character. That is nonsense — not because the underlying rule is nonsense, but because the rule was never aimed at him. Regulation 19 caps how much of an exchange any single entity may own. Regulation 20 defines who is “fit and proper” — no economic-offence convictions, no SEBI bar, no insolvency. Together they exist for one reason: an exchange is not a company that happens to be listed, it is market infrastructure — the referee every other trade passes through. You don’t want a disqualified operator owning the referee. That logic is sound. The gate belongs where control changes hands: block deals, strategic stakes, the 5% and 15% thresholds. Someone genuinely trying to control an exchange runs into the gate there — including, contrary to the comforting assumption, through slow accumulation in the open market. But that is not the audience reading a price ticker. The person seeing this note is placing a retail order that will never come within a mile of Reg 19’s caps. For him the warning is inert — a legal reflex bolted onto a consumer surface, communicating gravity while communicating nothing actionable. It is filed in the wrong drawer, shouting at the wrong person — a small artefact of how Indian market infrastructure talks to retail: maximal disclaimer, minimal discrimination between the shareholder who could tilt an institution and the one who owns a rounding error of it. Once NSE lists, the same red-note theatre will run under its ticker too.

]]> https://www.vimalsons.com/blog/when-the-ducks-are-quacking/ https://www.vimalsons.com/blog/when-the-ducks-are-quacking/ Sun, 14 Jun 2026 00:00:00 +0530 Two mainboard IPOs in six weeks. SEBI’s anchor-investor IPO architecture assumes the ducks are always quacking — and the lull is the diagnosis of who really holds the bag.

There is a line in investment banking — old enough that no one quite remembers who said it first — that goes: when the ducks are quacking, feed them. When the buyer is loud — retail queueing, oversubscription running, the headline reading “100× covered” — that is the moment to bring an issue to market. Greedy bands, OFS-heavy structures, the lead-manager’s anchor book parcelled out to relationship clients. Feed the ducks.

So what does the regulator do for the you and me — the domestic retail allocator? The IPO is the top of the capital-raising funnel. Equity is permanent capital — no repayment, no maturity, no contractual return — and the price at which it gets raised is, structurally, the high-stakes ground SEBI operates on.

Look at the mainboard IPO calendar between 1 May 2026 and the day this post goes live. Two listings.

For context: the primary market closed CY2025 above ₹1.7 lakh crore. The ducks, briefly, are not quacking. The architecture is, briefly, doing nothing. That brief nothing is the diagnosis.

The architecture assumes the ducks are always quacking. The current silence is what its design looks like with nothing to feed.

SEBI’s measure of success is oversubscription. The Goodhart frame from the previous post carries straight in: when a measure becomes a target, it ceases to be a good measure.

#1. The lull, the pattern, and who is holding the bag

Two mainboard IPOs in six weeks is, frankly, a yawn. The reason cited in every public summary is the same one word: valuation. Issuers want the band 2025 would have cleared. The 2026 buyer will not pay it.

Read across the trade press and you will see a reported pipeline of around 75 mandates with bankers, of which an industry-estimated 40 percent — call it 30 — are expected to clear in the near term. The rest are being deferred, with the same one-word reason. The bankers are not lying. The number is the symptom.

The deeper datum is on the other side of the trade. AMFI’s May 2026 release puts monthly SIP inflows at ₹30,954 crore — the third consecutive month above ₹30,000 crore, up 16 percent year-on-year. The SIP machine is the marginal buyer of every IPO of any size, and the demand it represents absorbed a reported $25.9 billion of FPI outflow through CY2025 with indices barely moving. The first five months of CY2026 have run that pace again.

The rule book the architecture is built on is in plain sight. Every book-built IPO in India runs the same Day-Zero sequence: one working day before retail bids, the lead managers allocate up to 60% of the QIB portion to anchor investors — institutional buyers who commit to a minimum bid of ₹10 crore each. The retail tranche is at least 35% of the issue, with each bid capped at ₹2 lakh per application. When retail is oversubscribed — which it almost always is on any IPO worth participating in — allotment is by lottery, one minimum lot per successful applicant.

There is one detail in this design that I want to underline. You can never qualify as a Qualified Institutional Buyer. Not by entity type, not by capital. A Foreign Portfolio Investor entity with ₹10 crore qualifies; you with ₹100 crore do not. The rule is not about wealth — it is about identity. You are on the wrong side of a glass wall that you cannot walk through, even if you have the bank balance to do so. The rule book draws the line between “retail” and “QIB” categorically, and the line will not move.

That is the entry side. The structure underneath it is what plays out when the rent is on offer — and the canonical illustration from the CY2025 listing class is Hexaware Technologies.

Hexaware was taken private by the Carlyle Group in 2020. The IPO five years later was the exit. The facts, in one table:

The seller had its liquidity event on Day Zero — the day retail’s bank accounts were debited. Retail allotted by lottery, after the ₹2 lakh cap, sat through the drawdown.

Read the sequence the way the architecture wrote it. Institutional capital got a one-day informational advantage on anchor day. Sixty percent of the QIB tranche was allocated to it under lead-manager discretion through Schedule XIII. The seller converted otherwise-locked equity into cash on listing day via the OFS route. Anchor unlock windows opened at 30 and 90 days. Retail held what was left.

That structural pattern is what plays out as the architecture is designed. The mechanism does the work; no rule book needed.

The carve-out manufactures clearing demand, the OFS converts insider equity to cash, the lock-in hierarchy gives the latest-arriving capital the fastest exit, and retail is left holding what each prior tier exited. It is the architecture working as intended. And, the architecture is designed in such a manner that retail might as well be called ‘bag holder category’!

#The rule book is the receipt

Regulation 16 of SEBI’s ICDR Regulations 2018 sets the lock-in periods — how soon each class of allottee can take cash off the table — and Regulation 17 the inscription and release mechanics. Here is the entire framework, in one table:

The order in which capital can exit an Indian IPO is the inverse of the order in which it took risk.

And the locks above apply only to the remaining shares an existing holder did not offload in the IPO itself. Carlyle in Hexaware sold ₹8,750 crore in the OFS and held nothing back. There is no lock-in on cash.

#2. SEBI’s mandate — being followed, or being gamed?

Section 11(1) of the SEBI Act 1992:

“Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.”

In 2009 the regime needed foreign capital. In 2026 it does not.

Three duties — protect investors, develop the market, regulate the market — and the regulator is required to weigh them. The 2009 anchor framework was, openly, a development intervention with an acknowledged cost to investor protection. In 2026, the development case has retired itself. The investor-protection cost has not.

SEBI’s own September 2024 study on IPO investor behaviour documented that 54 percent of non-anchor IPO shares, by value, were sold within one week of listing — retail loss-taking, by the regulator’s own data, inside the architecture the regulator designed. The same study, conspicuously, did not present anchor-versus-retail post-listing returns side by side. The regulator that has all the data did not present the one comparison that would settle the question. Make of that what you will.

And the 31 July 2025 consultation paper proposes — for issues above ₹5,000 crore — to deepen the development side (QIB 50 to 60 percent) and cut the investor-protection side (retail 35 to 25 percent), in exactly the regime that obsoleted the case for either move.

That is not three duties being weighed. It is one duty firing at the cost of another, with the regulator’s own data on the record and the next round of cuts already drafted. The mandate is not being followed. It is being gamed. Creating scarcity, privatising liquidity, and the egregious price discovery that follows from both — Section 3 below takes them apart in detail — is not what Section 11(1) authorises. The architecture engineers all three anyway, at the cost of the very investor the mandate exists to protect. The architecture doesn’t just allow retail to lose money. It is the mechanism by which they do.

#3. Where price discovery actually happens

Price discovery is the most difficult and most important part of any IPO. Globally there is no unanimity on the best mechanism for doing it — Section 4 below takes up the alternative this post lands on. This section is about why the Indian mechanism, as currently designed, fails the job.

The institutional defence is that the anchor carve-out does the discovery work — without committed institutional demand at the front of the book, the band would lack credibility and the issue would risk failure. The defence has three pieces. Each fails.

On liquidity, the carve-out does not enhance liquidity. It privatises it. The two most liquid windows in an IPO — anchor day and listing day — are reserved for institutional capital. The retail subscriber, who is the marginal buyer of the post-listing trade, has no allocation lever on the day price is set, and no informational lever on the day the order book is built.

On scarcity: the principle is not new. Identical goods attract higher willingness-to-pay when supply is restricted — desire is shaped by both hedonics (how good the thing is) and exclusivity (having what others cannot). Scarcity, in plain English, is the load-bearing variable in retail bidding behaviour. Is that rocket science?

The IPO mechanic puts the principle to work at industrial scale. With a ₹2 lakh retail cap, lottery allotment, and a retail-tranche-to-demand ratio fixed by the regulator, the 50 to 100 times oversubscription figure is a mathematical guarantee — not a market signal. The architecture is designed to produce that number, and then the same number is cited as evidence that the architecture is “working.”

And the receiving end of that engineered scarcity is the retail subscriber. Forty thousand applicants, fifteen lots, one minimum bid each. The same SEBI that has decided you cannot apply for more than ₹2 lakh of exposure has also decided that even within that cap, you are picked by random number generator. You cannot bid up. You cannot earn priority through track record. You cannot stand in line. The rules turn you into a roulette chip.

On price discovery itself, in a 50 to 100 times oversubscribed market — before anchors commit — the price has already been discovered by SIP-side demand. The anchor is not discovering price. The anchor is collecting rent on the spread between the price the SIP buyer would have cleared at and the strike the band locked in. That spread is the listing pop. It is not a discovery. It is a transfer.

And the cleanest piece of evidence is the lull itself. If the carve-out were doing genuine discovery, it would not exist; issues would clear because the architecture guarantees clearing. The lull is the architecture’s discovery function being replaced, in plain view, by its extraction function. When the rent is not on offer, the machine stops.

The “without anchors, retail gets hurt worse” line was true in 2009. It is doing different work in 2026.

#4. The way out — Dutch auctions

If the carve-out is no longer doing the discovery work, what does? Globally, the cleanest alternative is the Dutch auction.

The advantages are three. There is no listing-pop spread by construction — every successful bidder, institutional or retail, pays the same clearing price. There is no allocation discretion — no Schedule XIII, no relationship-favour pick. And the discovery is ex ante, by competitive bid, rather than ex post, by insider allocation and listing-day rent.

The bankers’ counter has always been the same line: retail wouldn’t price competently. This is the rent rationalised. In a market where retail SIPs absorbed roughly $25.9 billion of FPI exit through CY2025 with indices barely moving, and where clearing demand is — on the regulator’s own oversubscription number — manifestly not the binding constraint, the retail-can’t-price defence is a self-serving claim about a buyer the architecture has rendered indispensable.

The warning the post closes on is forward-looking.

NSE’s own IPO has been pending since the exchange first filed for a listing nearly a decade ago and withdrew. SEBI’s no-objection certificate was issued on 30 January 2026; the NSE board approved the plan on 6 February; the DRHP is reportedly expected by June 2026, listing reportedly targeted before December at ₹22,000–₹23,000 crore, reportedly a pure OFS. Reliance Jio’s DRHP is reportedly imminent on the press reporting available mid-June 2026 — not on SEBI or stock-exchange records as of writing — at a structure reportedly shaped as a fresh issue of around ₹25,000 crore, with industry-estimated valuation bands in twelve-figure US dollar territory.

If either of these lists under the rule book the consultation paper proposes — retail 25, QIB 60, Schedule XIII discretion intact, OFS route open, anchor architecture untouched — the structural value transfer this post has named will be channelled through the two largest issues in the country’s history, on the largest retail demat base it has ever had.

The honest response is to fix the architecture first, and bring NSE and Jio after. The 2009 rule book is not an heirloom. The market it was built for is gone.

The ducks are not quacking. The architecture has stopped doing the work it was designed to do — and that is the moment to ask, finally, what it should have been doing all along.

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#Notes on the data

• Mainboard IPO calendar, 1 May – 14 June 2026. Two listings: CMR Green Technologies (₹630.62 cr, listed 10 June 2026) and Hexagon Nutrition (₹139 cr, listed 12 June 2026). Aggregate under ₹800 cr. Sources: Chittorgarh IPO calendar, BSE/NSE listing pages, Goodreturns and Business Standard reporting.
• Pipeline figures. The “~75 IPO mandates currently with bankers” figure is an industry estimate cited in trade press through May–June 2026; not directly published by SEBI. The “~40% / ~30 of 75 expected to clear in the near term” figure is from the same reporting and is labelled “reported / industry-estimated” inline. Independently verifiable data point: 144 companies with SEBI approval targeting ~₹175,000 cr, plus 63 firms targeting ~₹137,000 cr awaiting clearance (Business Today / Subkuz, May–June 2026 reporting).
• AMFI monthly SIP inflow. ₹30,954 cr in May 2026 — the third consecutive month above ₹30,000 cr. Year-on-year up 16% from May 2025’s ₹26,688 cr. Source: AMFI monthly data release, May 2026.
• FPI outflow figures. Calendar 2025: net ₹2.16 lakh cr (~$25.9 bn) — the highest annual FPI outflow on record (Outlook Business, Business Standard). 2026 year-to-date pace already exceeding 2025 within five months. The earlier “$53 bn over 18 months” framing carried from prior research is reported (paraphrased from Aiyar’s column) and softened in this post to the verifiable pair “$25.9 bn in CY2025” + “comparable scale year-to-date 2026.”
• Hexaware Technologies IPO. Issue dates 12–14 Feb 2025, listed 19 Feb 2025. Issue price ₹708 (upper band of ₹674–₹708). 100% OFS by CA Magnum Holdings (Carlyle Group affiliate) for ₹8,750 cr. Listed at ₹745.50 — 5.3% premium. 52-week low ₹592.95 on 7 April 2025 (between the 30-day and 90-day anchor unlock dates, roughly 16% below issue). 52-week high ₹900.15 on 9 July 2025. Specific unlock-day closing prices not surfaced by reliable sources at the time of writing — claim held to the between-unlock-dates drawdown that is verifiable, rather than a specific unlock-day move.
• SEBI Act 1992, Section 11(1). Quoted verbatim from the operative text on sebi.gov.in / IndianKanoon.
• SEBI September 2024 IPO investor behaviour study. 54% of non-anchor IPO shares (by value) sold within one week of listing, across 144 mainboard IPOs listed April 2021 – December 2023. Source: SEBI Press Release, September 2024.
• SEBI 31 July 2025 consultation paper. Consultation Paper on Facilitating Ease of Doing Business relating to Anchor Investor Allocation, Long-Term Institutional Participation and Retail Quota in IPOs under ICDR Regulations 2018. For issues > ₹5,000 cr: retail allocation proposed 35 → 25%; QIB allocation proposed 50 → 60%. Public comment closed 21 August 2025. Source: sebi.gov.in.
• Dutch auction precedents. Google (Aug 2004): $85 strike, $100.34 Day-One close, ~18% pop — SEC filings, contemporaneous press. Morningstar (May 2005): $18.50 strike, $20.05 close, ~8% pop — Morningstar press release. Interactive Brokers (May 2007): $30.01 strike, $31.30 close, ~4% pop — SEC FWP filings, TheStreet. NetSuite (Dec 2007): $26 strike, ~25% Day-One run-up — Fortune, Techdirt.
• NSE IPO status (as of 14 June 2026). SEBI no-objection certificate 30 Jan 2026. NSE board approval 6 Feb 2026. DRHP reportedly expected June 2026. Listing reportedly targeted before December 2026. Issue size reported at ₹22,000–₹23,000 cr. Reported as pure OFS. Labelled “reported / expected” — DRHP not on the SEBI public record at the time of writing.
• Reliance Jio IPO status (as of 14 June 2026). DRHP filing reported as imminent — week of 15 June 2026 per IPOWatch / Multibagg — but not on the SEBI public record at the time of writing. Structure reported as ~100% fresh issue of ~₹25,000 cr. Labelled “reported / expected” throughout.
• Goodhart frame. Carried forward from the predecessor post — SEBI Is in a Regulatory Bubble of Its Own Making, vimalsons.com/blog/sebi-regulatory-bubble/ — where the formulation “when a measure becomes a target, it ceases to be a good measure” set the spine. Used here as the framing for the lull-as-diagnosis observation.

]]> https://www.vimalsons.com/blog/sebi-regulatory-bubble/ https://www.vimalsons.com/blog/sebi-regulatory-bubble/ Sun, 10 May 2026 00:00:00 +0530 India is now lagging the Asia Pacific basket by more than 25 percentage points YTD. Forty years of regulatory hostility to global capital — the regulatory bubble of SEBI’s own making.

There has been a lot of geopolitical noise in calendar year 2026. Over the last couple of weeks the discussion has tilted toward the idea that the Indian Stock Market has “held up relatively well” — and now that the noise has abated, “all is well.” This post is about that narrative.

A glance at the Nifty does seem to make us ‘buy the narrative’. I mean, we are within 10 percent of new all-time highs despite the geopolitics. But most of us are asking the wrong question. The Nifty has ‘held up’ — but compared to what? The Nifty against itself?

The right question is how we have done against a relevant peer set. India sits inside the regional Asia Pacific basket — the broad benchmark that holds us alongside Japan, Australia, China, Korea, Taiwan, and others. Here is how that comparison looks.

#The performance comparison

All returns are USD-denominated total returns, MSCI country indices, with iShares ETF NAV used as cross-check. As of 7–8 May 2026.

The last calendar year (2025) saw India print +2.6% in USD while peers ran away — South Korea +101%, South Africa +75%, Vietnam +67%, Mexico +56%, Brazil +48%, Taiwan +39%, China +31%. India came last in the basket, by a wide margin. 2026 year-to-date, India is down 8% in USD against an Asia Pacific aggregate up roughly 17% — a gap, in plain words, of more than 25 percentage points. The narrative of “we held up pretty well” is a comforting story; the data is not.

And here’s the inconvenient second fact: India is also the most expensive market in the regional basket at 20.6× trailing earnings, against an MSCI AP average of ~16×. We are charging the highest price tag for the slowest recent print.

Focus on that trailing P/E and on the most recent column. You may disagree with how global allocators behave — but disagreement does not change reality. The reality is what shows up on MSCI factsheets each month, and on those factsheets recency bias rules. Money flows toward markets that just printed well. It does not flow toward spreadsheet projections of where prices should go three years out.

One may also argue that India is a ‘growth story’ and hence the premium — but that seems to suggest we are once again, asking the wrong question. The question no one seems to be asking is this: in spite of the war, capital flows into emerging markets have remained robust — so why isn’t the Indian market getting its share?

Just to be sure, this is not some roundabout manner of saying that FII flows matter — they don’t. I have highlighted this earlier — FII Flows and Indian Stock Market Movements Are Not the Same ‘Ting’ — and I stand by that. But, the fact remains that capital will flow to where it is best treated.

Look at how Indian regulators have treated foreign capital across forty years — Swaraj Paul (1983, blocked from Escorts and DCM by an RBI cap on NRI holdings and LIC’s refusal to register his shares); Christopher Hohn / TCI (2012, ground down at the Calcutta High Court fighting Coal India’s below-market Fuel Supply Agreements that subsidise government power companies); Jane Street (July 2025, ₹4,843 crore (≈$580 million) interim SEBI disgorgement order over alleged expiry-day Bank Nifty manipulation). Different governments, multiple regulators, four decades — same message.

Why would any of these global investors ever attempt to invest in India again? And what kind of “signal” did the regulators inconspicuously send to every other purveyor of global capital watching from the sidelines?

If one were to look for consistency in regulation, it is in the hostility and in the signal that SEBI sends to global investors: India is a regulatory rabbit hole, beware. Forty years of consistently sending the same hostile signal — and by that metric India’s P/E has held up amazingly well. It is a pyrrhic victory. The premium India still commands is structural, not earned — I have walked through one of its mechanisms previously: Price Discovery — Structure drives Volatility in Indian Stock Markets. Foreign capital — think USD — continues to flow out, to destinations that welcome it. Investors are voting with their feet, and so would you, if you were wearing their shoes.

A skeptic might say the current gap is just the Iran war and the energy shock — and they would be partly right. But the trigger is not the cause. Korea and Taiwan absorbed exactly the same shock and printed +101% and +39% in 2025, because their regulators were busy welcoming the global AI-capex flow into local semiconductor capacity. India’s regulators were busy disgorging Jane Street. The shock is what exposed the structural setup. The structural setup is what made the exposure asymmetric.

#The wrong explanation

The standard reflex defence — “yes, but the economy is doing well, GDP growth is strong, the structural story is intact” — is wrong. The reason: the economy does not drive stock prices. Demand and supply do. What the economy can shape is the price-earnings ratio at which capital is willing to clear — and even that ratio is non-stationary — “the market P/E” is not a constant. Put plainly: it’s the regulatory tail wagging the market dog.

#The mechanism — demand is regulation, not economy

Demand for stocks is a function of regulation, not of the economy. Every rupee that finds its way into a secondary market is an allocator deciding this market is the best place to be, weighed against every other place that rupee could have been. The decision is shaped by entry rules, exit rules, tax treatment, dispute resolution, and the speed and predictability of regulatory action. The economy provides the menu of possible returns; regulation decides what is even on the table. The easier it is for a foreign investor to buy Indian stocks, the more demand there will be for them. By throttling capital, the regulator is sending the exact opposite signal — and when better alternatives are visible, the opportunity cost of not being in India shrinks toward zero. At zero opportunity cost, the rational allocator chooses to be elsewhere.

#The cumulative signal

The country multiple is what suffers. And if something is cheaper, the expected value of the bet is higher — isn’t this the very basis of how we allocate our own capital?

Layer the tax regime on top. The Securities Transaction Tax. The Vodafone and Cairn retrospective taxes — settled but never forgotten. The General Anti-Avoidance Rules. Capital-gains tweaks every Budget. Each defensible alone. The cumulative signal is not.

Securities-market regulation globally is a pain — but in India it seems systemic and possibly intentional, and STT revenues do matter to that intention. The direction of travel of foreign capital is a different question from the level of it, and the direction has been clear for some time. India is treated as a tactical allocation, not a structural one.

#The regulatory bubble

Through MPS rules, IPO sizing, FPI categorisation, derivative position limits, surveillance circulars, and disgorgement orders, SEBI has taken on the responsibility of guiding the market. The aggregate has suppressed small volatility for so long that the only way the underlying market can express itself now is through large, episodic dislocations. This is the regulatory bubble of SEBI’s own making — not a foreign actor, not a global macro event, but the predictable consequence of a regulator that confused the management of information about markets with the management of markets themselves.

Capital is voting with its feet — the vote is not anti-India, it is anti-being-treated-this-way. The establishment has spent forty years treating those as the same thing.

This is how SEBI treats global investors. They have chosen to invest elsewhere. What about local investors — you and me? That’s the next post.

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#Notes on the data

• All returns are USD-denominated total returns for cross-market comparability — local-currency returns are obscured by FX. MSCI country/regional index series used where available; iShares ETF NAV (INDA for India, AAXJ for Asia-Pacific cross-check, EEM for EM context) used as second source.
• MSCI India numbers are MSCI India (Net Total Return). YTD 2026 cross-checked against iShares INDA NAV.
• MSCI AC Asia Pacific numbers are approximate (~) for 2025 and 3-yr Avg — published sources varied; the YTD 2026 cell is anchored to the FT (May 2026) figure of more than 25 percentage points lag versus India.
• 3-yr Avg is the simple arithmetic mean of the per-year USD returns for 2023, 2024, and 2025 — not a compounded CAGR. Inputs are rounded to one decimal, so the average inherits rounding effects of similar magnitude.
• TTM P/E is trailing twelve months, not forward. Source disagreement (MSCI factsheet vs Investing.com vs stockanalysis.com) means single-decimal precision is overconfident; ranges shown where sources disagreed.
• Per-country callouts in prose (Korea +101%, Taiwan +39%, etc., for 2025) are MSCI country index USD returns from the same period. Available on request.

]]> https://www.vimalsons.com/blog/corporate-india-one-legged-contest/ https://www.vimalsons.com/blog/corporate-india-one-legged-contest/ Sun, 26 Apr 2026 00:00:00 +0530 When Buffett talks about buybacks, he talks about price discipline and per-share intrinsic value. In India, the regulatory environment is the capital allocation equation.

#A Brief History of Regulatory Whiplash

When Buffett talks about buybacks, he talks about price discipline, opportunity cost, and per-share intrinsic value. When Thorndike studies the outsider CEOs, the regulatory environment is background noise — it exists, but it doesn't fundamentally alter the capital allocation equation. In India, the regulatory environment is the capital allocation equation.

Here's what SEBI and the Finance Ministry did to buybacks in India over a span of less than three years. The regime, year by year:

#

Period	Buyback Tax	Who Pays	Open Market Route	Tender Offer Route
2013	115QA introduced (unlisted only)	Company	Available	Available
Jul 2019	115QA extended to listed; ~23.3% on distributed income	Company	Available	Available
2023 onwards	Company tax continues	Company	Phase-out begins: 15% → 10% → 5% caps	Available
Oct 2024	115QA repealed; deemed dividend at slab rates	Shareholder (up to 35.88%)	Cap continues	Available
Apr 2025	Slab-rate deemed dividend	Shareholder	Banned	Only route left
Feb 2026 (Budget)	Reverts to capital gains (LTCG 12.5% / STCG listed 20%) effective 1 Apr 2026	Shareholder	Banned	Only route
Apr 2026	Capital gains regime live	Shareholder	SEBI consultation paper to reintroduce	Available

• The 2019 extension to listed companies created its own asymmetry: participating shareholders got a tax-free exit, non-participating shareholders got nothing.
• Read that sequence again. In the space of three years, the Indian regulator banned open market buybacks, made the remaining route (tender offers) punitively expensive for shareholders, watched buyback activity collapse by 71% — from 48 issuances in 2023-24 to just 14 in 2025, with companies shifting to dividends instead — and is now proposing to undo both decisions.

#The Stated Rationale

SEBI's case for the 2023 phase-out (row 3 of the table above) rests on one phrase: "equitable treatment of shareholders." The concern was that in an open market buyback, one shareholder's sell order could be matched entirely with the company's purchase order, giving that shareholder a disproportionate benefit while others couldn't participate. To me this sounds stupid — plain and simple.

Every time anyone sells a stock on an exchange, the trade is matched with a buyer. That's what an exchange does. The fact that the buyer happens to be the company itself doesn't change the mechanics. Every shareholder had the same opportunity to sell into the buyback. The ones who chose not to sell benefited from the reduced share count — their proportional ownership increased. That's not inequity. That's how buybacks work.

As Buffett explained at the 2012 Berkshire meeting: "The value per share goes up when we buy at 110% of book, and it's so obvious to us, that we would do it on a big scale if given the chance." The non-participating shareholders benefit automatically because the pie is now split among fewer slices.

The per share value climbs, since the denominator — the free float of shares available — shrinks. Isn't that common sense?

#The Tax Disaster

But the regulatory route was only half the damage. The real devastation came from the Finance Ministry.

When buyback proceeds were reclassified as "deemed dividends" in October 2024, the tax treatment became absurd. Consider a shareholder who bought a stock at ₹500 and participated in a buyback at ₹600. Under rational tax treatment, the capital gain is ₹100, taxed accordingly. Under the deemed dividend treatment, the entire ₹600 was taxable as income at slab rates — with no deduction for the cost of acquisition. This is a fundamental error. Return OF money is return of capital — in principle, return of capital cannot be taxed. What is taxable is Return ON money, not Return OF money. Period.

Yes, you could claim a capital loss on the bought-back shares — but that loss could only be offset against future capital gains, creating a timing mismatch that disadvantaged every participating shareholder. The practical effect was to make buybacks irrational for any shareholder in a high tax bracket. The market responded predictably. Companies stopped doing buybacks. Activity collapsed. And the capital that would have been returned to shareholders through repurchases went where? Into dividends — which, ironically, are also taxed at slab rates but don't offer the per-share value enhancement that buybacks do.

#The Indian Jugaad: Tender Offer Buybacks

Now let's talk about the one route SEBI didn't ban — the tender offer.

Globally, a buyback is simple. The company buys shares in the open market. The shares are extinguished. The remaining shareholders own a larger slice of the same pie. Everyone's per-share value goes up. In India, SEBI mandated the tender offer as the only buyback route. And in a tender offer, the promoter is allowed to participate. Read that again. The promoter — the controlling shareholder — can tender their shares to the company.

Now think about what this actually means. The company uses its cash (which belongs to all shareholders proportionally) to buy back shares from... the promoter. The promoter gets cash. The company's treasury gets depleted. The share count may not move much — but the promoter's percentage holding goes up regardless. If the promoter tenders, they reduce their absolute shareholding but the remaining public float shrinks even faster. If the promoter doesn't tender, their percentage automatically increases as public shares are cancelled. Either way, the promoter wins. The mechanism was designed this way. But wait, it gets worse.

The tender offer buyback in India wasn't invented as a capital allocation tool. It was invented as a disinvestment tool. The government — as the promoter of PSUs — needed a way to reduce its stake in public sector companies and collect cash for the fiscal deficit, without the political optics of a traditional stake sale. A buyback achieves this beautifully: the PSU uses its own cash to buy back the government's shares. The government gets the money. The PSU's balance sheet shrinks. And the headline reads "buyback" instead of "disinvestment" — much cleaner politically.

PSUs falling under the DIPAM threshold — Coal India, NTPC, ONGC, NMDC, BHEL, HAL — were directed via the guideline to conduct buybacks. Not because these companies had determined that their stock was trading below intrinsic value. Not because the boards had evaluated opportunity costs and concluded that repurchases were the best use of capital. But because the government needed the cash to meet its deficit target.

The May 2016 DIPAM guidelines mandated that all CPSEs with net worth above ₹2,000 crore and cash/bank balance above ₹1,000 crore shall exercise buyback options. "Shall." Not "may consider." Shall. The 18 November 2024 revision raised the thresholds to ₹3,000 crore net worth and ₹1,500 crore cash, softened the language from shall exercise to may consider, and added a precondition that the market price must have been below book value for the prior six months — but the structure that produced a decade of PSU-buyback-as-disinvestment was already baked in.

This is the opposite of capital allocation. This is cash extraction dressed up as shareholder value. The company's cash — accumulated over years of operations, belonging to all shareholders — is routed to the government via a mechanism designed to look like a buyback but function like a dividend specifically to the promoter.

And SEBI, the market regulator whose stated purpose is investor protection, allowed this to become the standard mechanism. Then they banned the open market route — the one route where promoters couldn't participate — citing "equitable treatment of shareholders."

Filter the SEBI actions above through capital allocation and shareholder value, and you arrive where I left off in my prior post — Buffett's One Test for Management. Most CEOs Fail It.: the whole process stinks to high heaven.

#The Indian Capital Allocation Problem

This is where the Indian version of Buybacks diverges from global context completely. Globally, capital allocation is primarily a management problem. The regulatory framework is stable, the tax treatment is understood, and the toolkit is available. A CEO's ability to allocate capital well is constrained mainly by their own judgment.

Thanks to SEBI and the Indian Finance Ministry, Corporate India's capital allocation toolkit is volatile, and so is the attendant tax regime. A CEO who designs a capital return strategy today may find that strategy legislated out of existence tomorrow. This creates an additional layer to the management quality assessment for Indian investors. It's not enough to ask: does this management team understand capital allocation? You also need to ask: can this management team navigate a capital allocation framework that shifts every 18 months? The outsider CEOs that Thorndike profiles were foxes as defined by Isaiah Berlin — they made connections across fields and adapted to changing conditions. In India, being a fox isn't optional. It's survival.

In India, capital allocation is a regulatory problem first and a management problem second. SEBI is interfering in capital allocation of Corporate India without having any stake in the same. SEBI isn't a shareholder, yet it wants a say in how the free cash flow of the business is allocated. This is absurd. Capital allocation of a business in which SEBI has 'no skin in the game' is none of their business — they should stay out of the whole thing. PSU stocks may need a special regime — ideally even that isn't correct — but why the rest of Corporate India?

Buybacks are the most potent tool in the Capital Allocation tool kit, and SEBI just barged in and rammed it out of existence. What is even more shocking to me is that no one seems to mind! To use a Mungerism — Corporate India is like the 'one legged man in an ass kicking competition'.

---

Postscript: As of April 1, 2026, the regime has reverted to the capital gains model. In the ₹500 → ₹600 example above, you're once again taxed only on the ₹100 gain; your ₹500 principal is protected from the taxman. For now.

]]> https://www.vimalsons.com/blog/buffetts-one-test-for-management/ https://www.vimalsons.com/blog/buffetts-one-test-for-management/ Fri, 17 Apr 2026 00:00:00 +0530 After ten years on the job, a CEO will have deployed more than 60% of all capital at work in the business. Capital allocation isn\u2019t just a test of management quality \u2014 it\u2019s THE test.

In a previous post — Quality of Management — 3 — The BS Filter — I made the case that pattern recognition is the only reliable way to assess management when you can't sit across the table from them. But pattern recognition needs raw material. You need something to observe. Something that management actually does, repeatedly, over years, that you can track from the outside without ever meeting them. That something is capital allocation.

In my earlier post Quality Of Management — 2, I had argued that Capital Allocation decisions made by the management are directly and positively correlated with the returns we intend to make on our investment. The company you own needs to be run by someone who is genuinely good at deciding what to do with the cash it generates.

There is a concept in management theory called the Peter Principle. It says that in most organisations, people get promoted because they're good at their current job — not because they'd be good at the next one. A brilliant engineer becomes a mediocre manager. A great salesperson becomes a terrible VP. The promotions keep coming until the person lands in a role they can't handle — and there they stay. Over time, every position in a hierarchy tends to be occupied by someone who is incompetent to carry out its duties.

While this may appear to be a bit satirical — it is what actually happens in real time. Now, pair this with the seminal observation that Buffett has made decades ago: "After ten years on the job, a CEO whose company retains earnings equal to just 10% of net worth will have been responsible for deploying more than 60% of all the capital at work in the business."

The CEO — the management — ends up 'rebuilding' the business we have invested in, one capital allocation decision at a time. The business you own after a decade is primarily the product of how the CEO allocated capital, not what they inherited.

And if that CEO rose to the position through the Peter Principle — promoted for being a great engineer, a great salesperson, a great operations head — they're now playing a completely different game. One they never trained for. With 60% of your capital.

When we invest, we have no say in how the CEO or top management is appointed. But Munger gives us a shortcut — 'Invert, Always Invert.' Don't ask what makes a great capital allocator. Ask what kind of appointment virtually guarantees a terrible one. Buffett answered this decades ago. Here he is in a 1999 Nightline interview:

"We talked about a couple of these issues many years ago and you told me for one thing, yes, you would leave a little bit of money to your kids — you've got three kids — but the idea that you would leave all this money to your kids is just silly as far as you're concerned. Explain why."

I don't believe in the divine right of the womb. I see no reason why somebody that happens to win the ovarian lottery and come out of the right womb is entitled to fan themselves for the next fifty years — or command the resources of society.

If we're going to pick an Olympic team in the year 2000, I don't think we ought to take the eldest son or the eldest daughter of who won all the prizes in 1976 and put them on the team. I really believe in a meritocracy in athletics and I believe in a meritocracy in terms of who handles the resources of society. And we're a better society because that's the case.

Inherited leadership is the Peter Principle taken to its logical extreme. The Peter Principle at least requires you to have been competent at something before being promoted past it. Inheritance skips even that. When someone who never proved themselves at any level controls 60% of the capital at work in your business over a decade, the odds are stacked against you.

This is why capital allocation is THE test. Not a test. THE test. Everything else — the conference calls, the investor presentations, the stated strategy — is just talk. Capital allocation is what management does with your money when you're not looking.

William Thorndike, in The Outsiders, strips this down to its essentials. His tool kit is basically pretty simple and full of common sense, and the five tools he mentions are:

1. Invest in existing operations
2. Acquire other businesses
3. Pay dividends
4. Pay down debt
5. Buy back stock

And, the quote he uses is: "Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions the CEO makes in choosing which tools to use." ... and he adds — "It's the increase in a company's per share value, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO's greatness."

Per share value. Not total value. That distinction sounds academic until you see what happens when a regulator takes one of those five tools away from management entirely — and what Indian investors have been losing because of it. That's the next post.

]]> https://www.vimalsons.com/blog/quality-of-management-3/ https://www.vimalsons.com/blog/quality-of-management-3/ Sat, 11 Apr 2026 00:00:00 +0530 In Part 1, I ended with Phil Fisher \u2014 \u2018you never really know the girl until you live with her.\u2019 In Part 2, capital allocation was the knowable part. But what about everything that isn\u2019t in the numbers?

In Part 1, I ended with Phil Fisher’s line — “Getting to know management is like getting married — you never really know the girl until you live with her.” In Part 2, I argued that capital allocation is the one dimension of management quality that is genuinely knowable from the numbers. But that still leaves the harder question unanswered: what about everything that isn’t in the numbers?

Most of us will never ‘live with’ the management of the companies we invest in. We will never sit across the table from them in an unscripted moment. We will never watch how they behave when the auditor pushes back, or when a key customer walks away. We get the conference call, the annual report, and the carefully curated investor presentation. In other words, we get the performance — not the person.

So how do you fine tune your BS Filter?

#The Context Problem

Before we even get to filtering what management says, we need to confront a deeper issue — are we even measuring the right thing?

Christopher Mayer, in 100 Baggers, nudges us toward an uncomfortable truth. The CEO who delivered spectacular results in a turnaround is not the same CEO in a growth phase. The context changed. The person didn’t. And yet, we as investors carry forward a mental model of ‘good management’ that was forged in an entirely different environment.

Pulak Prasad puts it more directly in What I Learned About Investing From Darwin — “An exceptional CEO was impressive in a certain context with a certain business — this context and this business are different. How are we to know that the new CEO, faced with a set of challenges they have almost certainly never met before, will do what they are promising to do? We don’t.”

This is the context problem. Don’t elementalize — don’t separate the CEO’s performance from the company and market context in which that performance occurred. The same person can look like a genius in one setting and a mediocrity in another. Date your assessment regularly. The management you evaluated two years ago may no longer be the management you own today — not because the people changed, but because the landscape did.

#The Six Filters for Truth

If we accept that management quality is partly unknowable, then the next best thing is a good filter for sorting signal from noise. Scott Adams, of all people, offers something useful here. In How to Fail at Almost Everything and Still Win Big, he lays out what he calls the Six Filters for Truth:

1. Personal experience (human perceptions are iffy)
2. Experience of people you know (even more unreliable)
3. Experts (they work for money, not truth)
4. Scientific studies (correlation is not causation)
5. Common sense (a good way to be mistaken with confidence)
6. Pattern recognition (the most useful, but the hardest to master)

Adams’s punchline is devastating — each one of these is a complete train wreck. And yet, we mortals need to navigate the world as if we understood it.

Now apply this to corporate India. When management tells you on a conference call that ‘the demand environment remains robust’ or that ‘we are cautiously optimistic about the next quarter’ — which filter are you using? Personal experience? You haven’t run their business. Experts? The sell-side analyst asking the question is working for a fee. Common sense? That’s how most investors end up mistaken with confidence.

The only filter that has a fighting chance is pattern recognition — and it only works if you’ve built the pattern library over years of watching what management does after they finish saying things. That is the BS Filter from Part 2 in practice. The conference call is the input. The capital allocation decisions that follow are the output. The gap between the two is where your filter earns its keep.

#Reciprocity as a Proxy for Integrity

But what about integrity — the thing Buffett called the first quality you look for in someone you hire? Capital allocation tells you about competence. The BS Filter helps you track consistency. Neither directly measures integrity. And integrity, by its nature, reveals itself only under pressure — which means you usually discover its absence too late.

Is there any proxy that gets us close?

Richard Thaler’s Misbehaving offers one. In his work on fairness and cooperation, Thaler (drawing on Matthew Rabin’s reciprocity theory) shows that humans are conditional cooperators. People are willing to cooperate if enough others do. But if they sense that they’re playing with free riders, cooperation collapses.

The insight for investors is this: companies with strong reciprocity cultures produce observable markers. Voluntary turnover tells you whether people choose to stay when they could leave. Employee satisfaction scores — the genuine ones, not the curated Glassdoor posts — tell you whether the internal contract feels fair. Institutional knowledge retention tells you whether the organisation is a place where people build careers or merely collect paycheques.

These are the closest we get to measuring the unmeasurable. A management that treats its employees fairly, shares the gains of success, and doesn’t gouge during hard times — that is a management exhibiting reciprocity. And reciprocity, as Thaler’s experiments show repeatedly, is the foundation of sustained cooperation.

A company where talented people voluntarily stay, even when headhunters call, is telling you something that no conference call ever will.

#The Horse, The Jockey, and the Final Admission

After three posts, we arrive where Buffett did — “When management with a reputation for brilliance meets a company with bad economics, it’s the reputation of the company that remains intact.”

The horse usually matters more than the jockey. But knowing that doesn’t mean the jockey is irrelevant — it means you need to know which questions are worth asking. And the answer, after all of this, is fewer questions than you’d think. Can you track what they do with capital? Yes — that’s knowable. Can you filter what they say from what they do? Yes — but only with a pattern library built over years. Can you measure their integrity directly? No — but you can watch for the markers of reciprocity that reveal it indirectly. This is another test of Management Quality that you can use as a ‘hack’.

Everything else — the charisma, the vision statements, the confident projections about the next five years — is noise. Expensive, seductive noise.

#The Wealth Creation Inversion

Jeff Bezos, in an interview at The Economic Club Of Washington (9/13/18), said something that has stayed with me — “Somebody needs to make a list where they rank people by how much wealth they’ve created for other people. Instead of the Forbes list, which ranks you by your own wealth.”

That is the ultimate test of management quality. Not how much the promoter is worth, but how much wealth the promoter has created for everyone else — employees, shareholders, customers, the ecosystem. And here’s the catch: this metric is only knowable in hindsight. You cannot rank management by wealth created for others while they are still creating it. You can only see it when the story is done.

Which brings us full circle to Part 1 — ‘I know it when I see it.’ The trouble is, by the time you see it, the market has seen it too. The edge, if there is one, lies in reading the early signals — the capital allocation patterns, the gap between words and actions, the markers of reciprocity — before the story is fully written.

]]> https://www.vimalsons.com/blog/quality-of-management-2/ https://www.vimalsons.com/blog/quality-of-management-2/ Sat, 04 Apr 2026 00:00:00 +0530 Capital allocation is the one dimension of management quality you can actually track. Don\u2019t pay attention to what management says \u2014 pay attention to what they do.

In an earlier post Quality Of Management I had among other things, concluded management is better seen not heard. Unfortunately, most of us don't get to 'see Management', but we do 'hear' enough to form a ballpark judgement of what is 'important and knowable'.

Many of us tend to conflate the Quality of the Business with the Quality of the Management, and it is important to differentiate between the two. Quality of Management is secondary to the Quality of the business, which is another way of saying that the horse matters more than the jockey. Assuming one has managed to identify a 'quality business', then the next most important metric is the person who we as shareholders have 'hired' to run the business. In other words, as long as we are investing in a quality business, everything above that baseline is management quality. Quality of the Management ultimately will determine the 'value of the business'.

And, since we hear a lot from the management via the conference calls and also have access to the Annual Report, one of the best ways of tracking management quality is — don't pay attention to what they say — instead pay attention to what they do. In other words, we have to build a BS Filter — a Bull Shit filter — to pierce through the noise and find the signal.

Leadership, incentives, and capital allocation skills are, to me, the three areas for assessment of Quality of Management. Of these, Capital allocation is the one you can actually track. William Thorndike has written the definitive book on how to 'track' capital in his book The Outsiders and in it he says:

"The Outsiders were great capital allocators, not operators of great businesses. They succeeded across diverse industries. None had hot, easily repeatable retail concepts or intellectual property advantages versus their peers. Yet they hugely outperformed them. Industry didn't matter; capital allocation skills did."

In the book, he shares what you may call some kind of a checklist:

"CEOs have five essential choices for deploying capital — investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or buying back stock — and three alternatives for raising it — tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions the CEO makes in choosing which tools to use."

Buffett has recommended this book more than once, and he also shares the reason for his recommendation:

"After ten years on the job, a CEO whose company annually retains earnings equal to 10 percent of net worth will have been responsible for the deployment of more than 60 percent of all the capital at work in the business."

There you have it, the litmus test of the Quality of Management of a business is its Capital Allocation — what does it do with the free cash that business generates. The business is the horse. Capital allocation is the jockey's actual skill — and it's knowable from the numbers.

In the next part, I will share my thoughts on some of the above and also the parts that aren't 'knowable'.

]]> https://www.vimalsons.com/blog/quality-of-management/ https://www.vimalsons.com/blog/quality-of-management/ Sun, 29 Mar 2026 00:00:00 +0530 When we buy a stock, we expect the company to be \u2018well managed\u2019. But how do analysts know good from bad? Should past success be credited to the horse or the jockey?

The current negative market sentiment is a factor of geopolitics, much of which none of the participants have any control. The other huge overhang is the reality of an India market downgrade — A Clear Derating. Even this isn't something market participants have any say in or can do much about. The third spoiler is the resignation of the much respected Mr. Atanu Chakraborty (BSE filing). His resignation has brought into the focus the vexed topic of Quality of Management, and that is certainly something over which we as participants can 'exercise' our decision-making skills when one picks investments. In the immediate instance — to me, Mr. Atanu Chakraborty exhibited integrity — and that has to be applauded. For the participants as a whole his resignation seems to have caused jitters in the entire Banking 'space' and rightly so.

Think of it like this — when we buy the stock of a company we expect the company we have chosen to be 'well managed'. And, that means the promoters of the company, or their trusted lieutenants are people of integrity, and are also capable. We are in a way, hiring someone to do the 'heavy lifting'. The seminal Buffett quote is "In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you." and you can add this remark of his as an addendum — "If you hire somebody without integrity, you really want them to be dumb and lazy, don't you? The last thing in the world you want from someone who lacks integrity is for them to be smart and energetic."

How do analysts proclaim that one company has good management but another does not? How do analysts know good from bad? The short answer is that analysts do not exactly have a good role model to choose from. In reality, "good management" means that the company has done well in the past. But nobody seems to ask the next question — is the past success due to a good business model, or did the management make the most of a lousy business. In other words, should the past success be credited to the horse or the jockey.

How good are we at judging the 'quality of management' of a business? Our evaluation depends on whether we are seeing a lady or a flower girl — evaluating performance is like asking someone to define 'good pornography' and the answer is — 'I know it when I see it'. And, if you know it when you see it — it's probably too late!

I would be the first to admit that management is 'better seen than heard'. Unfortunately, most of us don't get to 'see management'. So, how does a 'know-nothing' investor perform this function? More important is if this critical metric is at all 'knowable'?

Let me take a step back and answer those who think that management quality doesn't matter — the short answer is that it does, and should be used as one of the FIRST metrics BEFORE one invests. Why so? "We would argue that not only do companies get the investors they deserve, but investors also get the companies they deserve." (Source: The Rational Cloner, Nick and Zak's Adventures in Capitalism)

Here is Buffett again — as quoted by Howard Marks in Mastering the Market Cycle — "Warren Buffett once told me about his two criteria for a desirable piece of information: it has to be important, and it has to be knowable." This quote has special relevance to today's environment since all of us suffer from some form of an information overload and that isn't going to stop anytime soon.

What is knowable in our assessment of Management Quality? How should one form a 'ballpark judgement' on the 'Quality of Management'? I will share my thoughts in an upcoming post. For this post these quotes should set the table!

• Buffett's own admission: "when management with reputation for brilliance meets company with bad economics, it's the reputation of the company that remains intact"
• Phil Fisher: "Getting to know management is like getting married — you never really know the girl until you live with her"

]]> https://www.vimalsons.com/blog/how-to-time-the-market/ https://www.vimalsons.com/blog/how-to-time-the-market/ Sun, 08 Mar 2026 00:00:00 +0530 All of us try to time our trades. When we get it right, we\u2019re fooled by randomness. Buffett\u2019s holy grail of market timing isn\u2019t what you think \u2014 it\u2019s building the patience to wait. All of us try and time every decision we make (be it a financial one or otherwise); and by definition that means we are going to try and time our trades. When we get the timing accurate, we are fooled by randomness, and end up thinking that we will continue to do so in the future as well.

When we decide to buy a stock, what we are doing is expressing an opinion about the market, not about the stock that we propose to buy. The perceived wisdom is “as goes the market, so go all the stocks in the market.” Reality proves this assumption to be ab initio incorrect. Many stocks diverge from the overall market trend (Dispersion). So, the timing game is two fold — the first part is expressing an opinion about the overall direction of the market and the second is expressing an opinion about the direction of the stock that we want to invest in. Most, nee almost all, investors tend not to understand the nuance.

If you want to emulate Buffett, his words are: “If we’re right about a business, and we think it’s attractive, it would be very foolish for us to not take action because we thought something about what the market was going to do or anything of that sort. Because we just don’t know.”

So, the idea is to invest in a good business, and not bother about the opinions of anyone else, and not heed to one’s behavioural biases. Once you’ve identified a good business, the timing of the actual buy trade doesn’t matter all that much, as long as one has a time horizon of a decade, at the very least.

Sticking with Buffett, this nugget from an interview of Bryan Lawrence is of immense value:

“When I started Oakcliff in 2004, I was lucky enough to find myself in a room with Warren Buffett and two dozen other aspiring stock pickers. We were very happy to ask him lots of questions, which pretty much all boiled down to, ‘How do we get to be like you but faster.’ He very nicely broke to us the bad news that stock picking was a long game, but he said, ‘I do have a piece of good news for you, the average stock goes up and down by 80% in a year. And that’s an enormous advantage if you actually take the time to understand the underlying business because the stock price is not reflecting underlying value if it’s going up and down by 80%.’”

“I said to myself, ‘80% in a year, he’s got to be out of his mind. He’s Warren Buffett, but he’s lost his mind.’ I went back to New York, and I did the calculations he was suggesting, which was to compare the 52-week high to the 52-week low for every stock in the stock market and compare the percentage difference between those two things. And when I did the calculations, maybe not surprising because he is the Sage of Omaha, he was right.”

So, there you have the HOLY GRAIL of ‘Market Timing’ — building the PATIENCE to wait for the inevitable swing in market prices. This actually resonates with what Seth Klarman has said: “You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.”

Nicolai Tangen is the CEO of Norges Bank Investment Management, Norway’s $1.4 trillion sovereign wealth fund. This nugget from him has immense wisdom: “The way to judge yourself is inertia analysis. Run your January 1 portfolio for the full year without any changes and compare it to your actual results. It’s awful because some years you realize all you did was subtract value when you went into the office.”

The question to ask might be: Would being inert, and not trading at all be better than ‘timing’ one’s trades? A portfolio tilted toward a diverse basket of stocks provides the engine for long-term growth. Yet, investors have a knack for over-complicating investing by trying to do too much. David Swensen (who wrote Pioneering Portfolio Management), described these tools as asset allocation, market timing, and security selection. Market timing and security selection are a net negative on portfolio returns. Emotions are the main culprit. Asset allocation works best when it’s left alone.

Many investors attend ‘stock market training classes’ which preach the use of Technical Analysis (TA) as THE ultimate tool for timing trades. The problem is that TA only shows the past and the assumption is that the future will repeat as it has in the past, but what if it doesn’t?

The final word on this topic comes from James Montier (a behavioral finance specialist and Senior Advisor to GMO): “One of the most useful things I’ve learnt over the years is to remember that if you don’t know what is going to happen, don’t structure your portfolio as though you do!”

]]> https://www.vimalsons.com/blog/fund-manager-lost-30-percent/ https://www.vimalsons.com/blog/fund-manager-lost-30-percent/ Thu, 19 Feb 2026 00:00:00 +0530 We pick mutual funds based on returns. What we never compare is what actually drives those returns \u2014 because it isn\u2019t stock selection. The largest equity funds hold nearly identical portfolios. We pick mutual funds based on returns. We compare NAVs, star ratings, rolling averages. What we never compare is what actually drives those returns — because it isn’t stock selection. The largest equity funds in India hold nearly identical portfolios. The same banks, the same IT companies, the same consumer names. If everyone owns the same stocks, what exactly is differentiating their returns?

Lee Freeman-Shor was Co-Head of Equity Research at Old Mutual Global Investors, managing over £1 billion in assets. Citywire ranked him among the world’s top 1,000 fund managers in 2012 and gave him their highest AAA rating. Between 2006 and 2013, he ran an experiment — he allocated between $25 million and $150 million each to 45 of the world’s best investors, with one constraint: they could only invest in their ten best ideas. Over seven years, he tracked 1,866 investments and over 30,000 trades. The period covered the 2008 financial crisis, the recovery, and the European debt crisis — about as brutal a testing ground as you could design. He documented his findings in his book The Art of Execution: How the World’s Best Investors Get It Wrong and Still Make Millions.

His question was simple: ‘What separates the investors who make money from those who don’t?’ The answer was not what anyone expected. It wasn’t about stock selection. The same stocks appeared in multiple portfolios. Some managers made fortunes on a stock while others lost money on the exact same company during the same period.

Freeman-Shor found that nearly half of all investments made by these elite managers — 49% — lost money. These weren’t amateurs. These were the best in the business. And they were wrong about as often as a coin flip.

What separated the winners from the losers was not how often they were right. It was how they behaved when they were right and how they behaved when they were wrong. In other words, the difference was entirely in the behavior of the fund manager after they had executed the BUY leg of the transaction.

#Five Tribes, One Stock

Freeman-Shor identified five distinct behavioral patterns. He called them tribes. What’s striking is that you could give the same stock to all five tribes and get five completely different outcomes.

Rabbits froze when a stock went against them. They did nothing. They held a losing position, waiting for it to come back, paralyzed by the hope that they’d be proven right. Most never were. The Rabbits were the largest tribe, and the worst performers.

Assassins had a simple rule: if a stock dropped 20–33% from their purchase price, they killed it. No deliberation. No hoping. They took the loss and moved on. They were wrong often — but their losses were small, and they lived to fight another day. They followed the Buffett dictum: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Hunters did something counterintuitive. When a stock dropped, they bought more. But — and this is critical — they only did this when their conviction in the original thesis was intact and they had kept cash reserves specifically for this purpose. They weren’t averaging down out of denial. They were executing a plan.

Raiders were good at buying. They picked good stocks. But they couldn’t hold. As soon as a stock showed a profit, they grabbed it. A 20% gain felt good, so they locked it in. The problem: the stocks they sold for 20% gains often went on to become 100% or 200% winners. They cut their flowers and watered their weeds.

Connoisseurs were the rarest and most successful tribe. When a stock moved in their favor, they trimmed a portion — maybe a third — to lock in some profit. Then they let the rest run. They had the discipline to be “indulgent with winners and impatient with losers” — the exact opposite of human nature.

Same stocks. Same market conditions. Five different behaviors. Five wildly different outcomes.

#Conclusion

The bloodless verdict of the market is pretty consistent across time frames — markets pay the Connoisseur and punish the Rabbit — and the only difference between them is what they do after they invest. Markets don’t care about how smart the fund manager is, how many hours of research have been conducted and by how large a team.

Since we are all so gung-ho about investing in mutual fund schemes — treating our SIP allocations as if they were interest-bearing EMIs — has any of us ever managed to investigate how the fund manager of the fund we’ve invested in actually behaves?

When a core holding crashes 30%, is your manager a Hunter, an Assassin, or a Rabbit? We demand transparency on fees but accept a total blackout on behavior. And if you’ve been thinking along those lines already — how exactly will you find out?

]]> https://www.vimalsons.com/blog/price-discovery-volatility/ https://www.vimalsons.com/blog/price-discovery-volatility/ Mon, 09 Feb 2026 00:00:00 +0530 India\u2019s stock market volatility isn\u2019t a mystery \u2014 it\u2019s the logical outcome of its architecture. The \u2018Vertical Wall\u2019 ensures that every marginal rupee has an amplified impact on price.

#Introduction

Investors often look at the Indian stock market and see a paradox: valuations that seem perpetually expensive and price swings that feel disproportionately violent. While global commentators often attribute this to India's "growth story" or the unpredictable nature of Foreign Institutional Investor (FII) flows, the real answer isn't found in buyer sentiment. It is found in the physical architecture of the exchange — a phenomenon I call the "Vertical Wall."

To understand Indian price discovery, one must look past the ticker tape and toward the market's underlying plumbing. In most developed markets, the rules of supply and demand operate within a wide, fluid channel. In India, those same rules are forced through a narrow bottleneck, creating a structural constraint that governs everything from IPO pricing to sudden market crashes.

This isn't a failure of the market mechanism itself; rather, it is a feature of a specific, defensive design. By tracing the history of corporate India back to a single pivotal moment in the 1980s, we can see how fear — rather than economic efficiency — constructed the vertical supply curve that defines Dalal Street today.

#The 1983 Ghost That Still Haunts Dalal Street

The current structure of the Indian market was born out of a panic that occurred forty years ago. In 1983, Swraj Paul, a London-based NRI, launched hostile takeover attempts against two industrial titans: Escorts and DCM. At the time, the controlling families held dangerously low stakes; HP Nanda ran Escorts with less than 5%, while the Shriram family controlled DCM with about 10%.

Using shell companies, Paul accumulated more shares than the promoters themselves held. The raids only failed because the Life Insurance Corporation (LIC) and other institutions opposed the transfers, effectively freezing Paul out. This intervention saved the promoters, but it shattered the confidence of every industrialist in India.

The reaction was a massive, 180-degree reversal of market philosophy. Before 1983, companies seeking to list were required to offer 60% of their shares to the public. After the Paul raids, promoters began "defensive hoarding," consolidating holdings until 70–80% of companies were locked away from the public.

Today, SEBI mandates a minimum 25% public float, effectively normalizing a structure where 75% of a company remains "dead supply." What was once a market characterized by public participation became one dominated by insider ownership. Fear, not optimal design, shaped the current market.

#The "Vertical Supply Curve" and the Commodity Trap

To understand why this hoarding matters, we must distinguish between different types of supply. Jeff Currie, a legendary voice in global markets, highlights a fundamental distinction between how prices are formed in commodities versus equities:

"In commodities and in FX rates... for every long, there's a short. So if I'm buying, somebody had to introduce that short on the other side. There is no constraint... An equity is long only. The SEC controls the amount of supply of an equity. So when an investor buys an equity, he's buying against a vertical supply curve. So as he buys it, he can push it up."

In a commodity market, supply is elastic; if demand for wheat rises, shorts can be created to balance the trade. In equities, however, the supply is fixed by the regulator. Because supply cannot expand to meet a surge in demand, the only way for the market to reach equilibrium is for the price to rise sharply.

This leads to a critical "aha!" moment: "hot money" cannot drive price discovery in commodities because fundamentals eventually provide supply. In equities, however, hot money is the price driver because the vertical supply curve offers no escape valve. In India, this supply curve isn't just vertical; it's reinforced steel.

#India's Extreme Math (75% vs. 1%)

The vertical supply curve exists globally, but India represents the most extreme version of this mathematics. In the United States, major companies are professionally managed with highly dispersed ownership. For example, Bill Gates is the face of Microsoft, yet he holds less than 1% of the free float.

In India, the norm is a 75% promoter holding, creating a regulatory bottleneck. This structure is perfectly mirrored by the oil hub of Cushing, Oklahoma. In 2020, limited physical storage in Cushing meant that even modest selling pressure forced the clearing price to an absurd -$40 (negative) per barrel.

Key Structural Elements:

• Locked Supply: 75% of shares are with promoters who rarely, if ever, sell during normal market cycles.
• The Narrow Channel: Price discovery for the entire company is forced through a tiny 25% channel of tradable shares.
• Amplified Magnitude: Because three-quarters of the supply cannot respond to price changes, any marginal inflow or outflow causes a disproportionate price move.

#FIIs Are the Symptom, the Structure Is the Cause

When the market drops, the financial media is quick to blame FII selling. However, this narrative confuses the trigger with the structural cause. The volatility we attribute to foreign investors is actually a function of the supply constraint.

Consider a counterfactual: Imagine an FII outflow of ₹50,000 crore. In a theoretical market with a 50% free float, that selling pressure is distributed across a large pool of shares. In India's actual 25% float market, that same pressure hits a wall because 75% of the supply is locked and cannot respond.

To find enough buyers among the tiny 25% pool, the clearing price must "overshoot" on the downside. We saw this extreme logic at play in Cushing's -$40 oil; the mechanism still worked, but the structure dictated how violent the price move had to be.

Key Realization: The clearing price mechanism still works, but India's constrained supply structure ensures that prices must move with significantly more magnitude to find equilibrium among the tradable 25%.

#The Institutionalization of a Bottleneck

If a 25% free float causes such extreme volatility, why haven't regulators increased the requirement to 50%? The answer is "regulatory capture." The current system provides significant benefits to a powerful group of stakeholders who prefer the status quo:

• Promoters: They maintain absolute control without the threat of another Swraj Paul-style raid.
• Investment Bankers: Scarcity helps support high IPO pricing and successful share sales.
• Media: FII flows provide a simple, recurring narrative for daily market movements.
• Regulators: Avoiding the political controversy of forcing promoters to dilute their stakes.

Expanding the float to 50% is economically sensible for market health and efficiency. However, it remains politically difficult because it would dismantle the defensive walls built after the 1983 scare.

#Conclusion: Beyond the Vertical Wall

India's stock market volatility isn't a mystery; it is the logical outcome of its architecture. The "Vertical Wall" ensures that every marginal rupee of inflow or outflow has an amplified impact on price. This structure is a relic of a 40-year-old takeover scare that has been institutionalized into the very fabric of the exchange.

While the clearing price mechanism still functions, it does so through a narrow, constrained channel that produces more extreme outcomes than fundamentals justify. We must ask: can the Indian market truly be considered "developed" if its core mechanism is still a defensive crouch from the Cold War era?

The volatility we blame on external flows is actually the price we pay for a market structure built on the fear of 1983.

Sources & Research Notes:

• FII Flows and Indian Stock Market Movements Are Not the Same 'Ting'
• Swraj Paul was an important and influential figure of 20th Century India — Vir Sanghvi
• Hostile Takeovers In India — Mondaq
• Requirement of Public Holding for Listing
• Minimum Public Shareholding in India: Rules, Guidelines and Implications — 5paisa

]]> https://www.vimalsons.com/blog/fii-flows-indian-stock-market/ https://www.vimalsons.com/blog/fii-flows-indian-stock-market/ Wed, 28 Jan 2026 00:00:00 +0530 In Nassim Taleb\u2019s Antifragile, Fat Tony made $18 million during the Kuwait War while sophisticated analysts lost fortunes. His explanation? \u2018Kuwait and oil are not the same ting.\u2019

#The Fat Tony Lesson

In Nassim Taleb's book Antifragile, there's a character called Fat Tony — a street-smart trader who made $18 million during the Kuwait War while sophisticated analysts lost fortunes. Everyone expected war to raise oil prices. The "smart money" was long oil. But Tony bet against this consensus, reasoning: "if everyone expects it, it's already in the price." Oil collapsed from $39 to ~$20 when the war began.

Fat Tony's explanation? "Kuwait and oil are not the same ting."

Just because two things correlate (or seem like they should), drawing conclusions and placing bets on assumed correlations isn't prudent. As on date, even seasoned market participants seem to conflate the event, ergo persistent FII selling in Indian equities with falling stock prices of small and mid-cap stocks.

For Fat Tony, the distinction in life (and true for markets as well), isn't True or False, but sucker or non-sucker. A sucker focuses on being "right" in the abstract while ignoring practical consequences. A non-sucker focuses on exposure, payoffs, and what the data actually says.

#What Market Analysts See → What They Assume

• FII flows published daily → Must be important driver
• FIIs are buying → Market will go up
• FIIs are selling → Market will go down
• FII data is easy to track → Must explain market moves

But market participants seem to miss what the data shows — FII flows and Indian market movements are not the same 'ting'!

#The Conflation Error

The consensus assumption is that FII (Foreign Institutional Investor) flows drive Indian stock market movements. When FIIs buy, markets go up. When FIIs sell, markets go down. The data shows no such correlation. This is a textbook example of confusing correlation with causation — except the correlation itself doesn't exist.

#The Evidence

#Devina Mehra's Analysis (from her book, Money, Myths and Mantras)

1994–2003: The Definitive Test

"And 1994 to 2003 is the only nine-year period in Indian market history where the Sensex return was a net zero! This new slew of money came in and did absolutely nothing at all for the markets. Even on a month-to-month basis, there was no correlation between FII flows and stock market movements, as we used to track it closely during the nineties. Strangely enough, the very first month when the FII flows turned negative, meaning the FIIs were net sellers, the market was up. That was further proof to me that market movements could not be predicted by forecasting FII flows. It was an exercise in futility."

The Data:

• 1994–2003: Net FII inflows (started in earnest 1994) → Sensex return = Net zero → Correlation: None
• First month FIIs turned sellers: Net outflows → Market went up → Correlation: Inverse
• Month-to-month basis: Tracked closely → No pattern → Correlation: None

Her key quote: "It has always amazed me that no one wants to look at the data to see whether there is a correlation at all between FII flows and Indian market movements!"

#Why the Myth Persists

#Affirming the Consequent (The Media Logic Trap)

The media creates this narrative through a formal logical fallacy (syllogism):

• Premise 1: If FII sells (P), then market goes down (Q)
• Premise 2: Market went down today (Q)
• Conclusion: Therefore, FII must have sold (P)

After a market move, the media needs to find reasons — as long they are plausible and the retrospective pattern matches, we are stuck with this narrative.

#Reality Beats Perceptions

ALL market movements all over the world are just due to the most simple dynamic — more buyers than sellers or vice-versa. Which is another way of saying that any imbalance between the equation will cause a shift.

#The Math That Breaks the Narrative

Total Market Participants:

• Retail investors (buying/selling)
• Domestic Institutional Investors / DIIs (buying/selling)
• Foreign Institutional Investors / FIIs (buying/selling)
• Proprietary traders (buying/selling)
• High-frequency traders (buying/selling)

Market movement depends on NET IMBALANCE across ALL participants. FII flows are just one component of total buying/selling.

#The Fundamental Mechanism (William Bernstein)

"Anyone uttering such nonsense should be pulled over by the finance police and forced to wear a bright red sign around their neck labeled 'Rube.' To reiterate, for every seller there is a buyer, and vice versa. All that changes is the price at which market transactions occur." — William J. Bernstein, The Investor's Manifesto

#The Error in "More Buyers Than Sellers"

If the media were to ever say: "Markets went up because there were more buyers than sellers today," strictly speaking that wouldn't be correct. What actually happens:

• When buying pressure increases, the price must RISE to the point where it induces holders to sell
• When selling pressure increases, the price must FALL to the point where it induces buyers to step in

Key Points:

• It's not about NUMBER of buyers vs. sellers
• It's about the INTENSITY of their desire to transact
• Price adjusts until equilibrium is reached

#Applying This to FII Flows

The FII narrative assumes: "FII selling → More sellers than buyers → Market falls"

But Bernstein's mechanism shows: For every rupee FII sells, someone BUYS that rupee. Total sellers = Total buyers (always).

The question is: At what PRICE does equilibrium happen?

In markets, price is set by the most panicked seller (buyer) at the end of a trading day. Size of flow matters LESS than the INTENSITY (urgency) of the desire to transact.

#Conclusion

Correct mental model (Bernstein): FII flows are like an auction. When FII wants to sell, price adjusts until someone is willing to buy. When FII wants to buy, price adjusts until someone is willing to sell.

The media in particular, and market participants seem to be asking the wrong question. Instead, ask:

• Are stocks gapping up on volume? (Buyers desperate)
• Are stocks breaking support on low volume? (Sellers give up, buyers patient)
• Is the market absorbing selling easily? (Strong hands buying)
• Is the market rejecting rallies? (Weak hands selling)

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