SEBI’s rules quietly explain why so many loss-making startups still manage to list on Indian stock exchanges. Financial analyst Jayant Mundhra recently broke down how a special route under Regulation 6(2) allows high-growth, cash-burning tech companies to go public, while also creating conditions that can badly hurt late retail investors when the hype fades.
Why Loss-Making Startups Can List
Under the standard rulebook of SEBI, a company should show operating profit for at least three consecutive years to qualify for a mainboard IPO. Most new-age tech startups do not fit that profile. They prioritise user growth, market share and GMV over near-term profitability, often running deep losses as they subsidise prices and spend heavily on marketing. To accommodate this model, SEBI introduced an alternate route under Regulation 6(2), which lets such companies list even if they are loss-making or only just turned profitable, subject to stricter conditions on who can buy the IPO.
The regulator’s logic is simple. Rather than shutting the door on India’s tech ecosystem, it prefers to let sophisticated investors fund these stories in the public market under tighter safeguards. This allows startups to access public capital and gives early venture investors an exit path, even when the P&L is still in the red. At the same time, SEBI tries to protect less-informed retail investors by changing the way shares are allocated.
The 75% QIB Rule and Why it Exists
The special 6(2) route comes with one big condition. At least 75% of the IPO must be reserved for Qualified Institutional Buyers (QIBs) such as mutual funds, foreign portfolio investors, insurance companies and large banks. Only around 10% is set aside for small retail investors, with the rest going to non-institutional/HNI investors. The idea is that institutions have the research teams, models and sector experience to value a loss-making startup more rationally than a small trader who is swayed by brand buzz and social media narratives.
This structure also helps on two other fronts. First, it makes Indian IPOs more attractive for large sovereign wealth funds and global long-only funds that need sizeable allocations to bother deploying capital. A guaranteed 75% institutional bucket gives them enough volume to build meaningful positions. Second, it solves the “exit problem” for VCs and early-stage funds. If they know there will be a deep, institution-heavy market at listing, they are more comfortable backing risky startups in the private phase, which in turn supports India’s innovation pipeline.
The Dark Side: Low Float and the Listing Pop
Mundhra’s key warning is about what happens after listing. In many of these IPOs, most shares continue to be held by founders and pre-IPO investors. SEBI rules then impose lock-in periods, often six months to one year or longer, during which these large shareholders cannot sell. Even institutions that got allotment in the QIB portion face restrictions on immediate exits. Put together, this creates an extremely low “free float” in the market for the first few months.
With only a small percentage of the total shares actually available to trade but huge post-listing hype around a marquee tech brand, demand vastly exceeds supply. The result is a sharp “listing pop” where the stock price rockets on debut and in early sessions, making the IPO look like an enormous success. Retail investors see soaring charts, headlines about bumper listing gains and social media screenshots of profits, and rush in at ever-higher prices without realising they are operating in an artificially constrained market.
What Happens When Lock-Ins End
The real test comes when the lock-in period expires. At that point, founders, early employees, and especially VCs who bought in at very low cost can finally sell. Overnight, the supply of shares in the market explodes. If business performance and sentiment have not improved enough to absorb this new supply, prices often collapse under the weight of selling. Mundhra notes that in several cases, stocks which delivered big listing gains eventually fell below their IPO price once lock-ins ended and early backers booked profits, leaving late retail entrants nursing serious losses.
This pattern has been seen across multiple new-age listings, including consumer-facing digital brands where IPO mania was high. The policy does achieve its primary objectives of deepening markets and providing exits for early investors. However, it also creates a structural asymmetry. Sophisticated “smart money” enters early (often in private rounds) and exits in an orderly fashion, while ordinary traders tend to enter late in the hype phase and are left holding the bag when supply normalises.
Ola Electric, Zomato, Paytm and Swiggy: Listing While in the Red
India’s most high-profile tech IPOs underline this dynamic. Zomato, for instance, listed in 2021 at a time when it was still loss-making on a consolidated basis, but was allowed to tap the market under the 6(2) route with a heavy QIB allocation and strong backing from global funds. The stock initially surged well above its issue price on listing enthusiasm, before later seeing sharp drawdowns as growth, profitability timelines and tech valuations were reassessed. Over time, as Zomato moved closer to profitability and trimmed losses, sentiment and price gradually recovered.
Paytm’s parent One97 Communications followed a similar pattern. It went public despite substantial losses, with a very large institutional allocation and strong anchor book participation. The IPO was heavily hyped, but the stock fell sharply below the issue price after listing and stayed under pressure as questions mounted around its business model, cash burn and regulatory risks. Paytm became one of the most cited examples of how retail investors who bought into the hype at high valuations suffered once initial euphoria faded and larger shareholders got more flexibility to sell.
Ola Electric is another example from the EV space. It listed while still incurring sizable losses as it scaled manufacturing, R&D and distribution. After a promising debut and strong narrative around India’s EV future, the stock has struggled to sustain early levels, recently hitting new lows as promoter-level share sales and broader concerns about execution and profitability weighed on investor sentiment. Here too, a combination of loss-making status, concentrated early ownership and eventual supply from insiders has made the ride for post-listing retail investors extremely volatile.
Swiggy, which has filed for a public listing and is working toward its own IPO, is expected to follow a similar regulatory path. The company has historically run deep losses while building food delivery and quick commerce at national scale. When it does list, it will almost certainly rely on the 6(2) route with a 75% QIB reservation, giving institutional investors primary control over price discovery and leaving a small retail bucket competing for a thin initial float.
What Retail Investors Should Take Away
Mundhra’s core message for small investors is caution. The fact that SEBI permits loss-making startups to list under Regulation 6(2) is not in itself a red or green flag. It reflects the realities of tech business models and India’s ambition to nurture its startup ecosystem. What matters is understanding how the 75% QIB rule, tight lock-ins and low float can artificially boost prices in the early phase and then reverse violently when real supply comes in.
For retail traders, that means resisting the urge to chase every hot listing just because it opens 30–50% up. It is critical to study the shareholding pattern, lock-in schedules, business fundamentals and path to profitability, rather than relying on listing-day sentiment. In this structure, smart money often enters long before IPO and exits with discipline, while public investors who do not understand the mechanics risk buying at the worst possible time.
In short, the framework around loss-making startup IPOs may be helping India mature as a capital market and attract global capital, but it can also turn into an “artificial scarcity trap” for unprepared retail investors if they mistake a low-float listing pop for a guaranteed long-term win.
