PhonePe IPO: Why Biggest Investors Dumping Shares(Rs.10k cr.) Before Listing?

PhonePe and its impending IPO can become one of the biggest talking points in Fintech IPOs in India, even before the official filing. However, as opposed to the usual pre-IPO hype, market participants have observed a rather unusual phenomenon - large and early investors have started offloading close to ₹10,000 crores worth of shares before the public offering.

This leads to a significant inquiry from market participants who are tracking PhonePe IPO news and predicted upcoming IPOs:

Given the enormity of PhonePe as a fintech player, why are pre-IPO investors attempting to exit prior to the IPO? We attempt to answer the valuation logic and pre-IPO share sale, as well as, possibly more importantly, what this means for retail participants in the PhonePe IPO.

Perspective on PhonePe’s Role in India’s Fintech Sector

PhonePe is an exemplary startup case in India’s burgeoning fintech scene. It is currently the most valuable fintech startup in India and offers UPI payments processing services and 50% of the UPI transaction value. The services that PhonePe offers are diverse, with options including payments to other users, splitting bills, insurance, mutual funds, and lending. PhonePe has built a super-financial app.  

With Walmart as an investor, PhonePe used to be part of Flipkart until it was separated, re-domiciled to India, and turned into an independent entity, a necessary action for the impending IPO.  

On the surface, everything seems to be in place for a successful Indian fintech IPO. But, the investors' behaviours prior to the IPO tell a different story.  

 

 

What’s Going on Prior to the PhonePe IPO?

Reports suggest that, ahead of the upcoming IPO, early and late-stage investors will be selling PhonePeequity in the Secondary Market for a total value of close to ₹10,000 crores. Such equity sales are not distress sales, but rather planned exits for:

• Early-stage VCs.  
• Growth VCs.  
• ESOP employees.  
• Strategic investors post portfolio rebalancing.  

Consequently, there’s a strong sentiment regarding PhonePe’s valuation, sustainability of growth, and the price it will ultimately trade at on the stock exchange at IPO.

Reason 1: Pre-IPO Liquidity Is No Longer Rare

In the past, investors only had one way out and that was through IPOs. Now, India's private markets have matured.

For recent large startups like PhonePe: 

- Secondary sales enable investors to secure early profit. 

- Funds can return capital to LPs, and do so before the listing.

- Employees can cash out ESOPs, and do so without market risk.

In one word, pre-IPO investors selling shares does not mean a loss of confidence. It shows the sophisticated reach of the private capital markets.

Reason 2: PhonePe Valuation Has Already Been Priced Aggressively

One of the more notable reasons behind the sell-off is valuation maturity. With each funding round, PhonePe’s valuation seems to be stuck at $12-$15 billion. At this valuation: 

- Early investors are sitting on multiple returns. 

- Potential returns relative to IPO pricing are incremental, not exponential.

- A greater risk-reward potential exists for a partial exit. 

For many pre-IPO investors, the logic is simple- why wait for listing volatility when 70–80% of the potential upside was captured privately? Especially during a time when IPO pricing is being scrutinised more than ever, this reasoning is solid.

 

 

Reason 3: Regulatory Overhang in Fintech IPOs

Even with PhonePe being the leader in UPI Volume, monetisation is still highly regulated.

Some of the challenges include the following:

• UPI MDR (merchant discount rate) is almost nothing.
• Volume of payment transactions does not mean a profit.
• Regulations imposed by the RBI restrict the ability to set prices.

For all intents and purposes, this is not a PhonePe problem, but rather the entire fintech IPO India problem. Investors understand the nuance that scale ≠ profitability concerning regulated components of financial infrastructure. Having the opportunity to exit partially before an IPO helps reduce exposure to policy-driven downside risk.

Reason 4: IPO Is Also an Exit Event-Not Just Fundraising

Some investors are under the impression that the IPO is merely a tool for securing the capital necessary for the business to employ in pursuit of its growth initiatives. However, in fact:

IPOs are liquidity events

They allow early capital providers to rebalance portfolios. Selling before the IPO does reduce lock-in and price risk. Large institutional investors face fund lifecycle constraints. If a fund is nearing its end of life, a secondary exit, even pre-IPO, becomes prudent. This is the reason, even in fully confident scenarios, investors are still likely to sell some of their stake and, in some cases, all of it.

Reason 5: Market Has Become Selective With New-Age IPOs

After 2021, the Indian markets will be maturing. Retail and institutional investors now pose tougher questions: What is the basis for achieving profitability? How sustainable is user growth? Is the valuation supported by cash flow?

Investors have become more cautious due to prior experiences with new-age listings. Concerning upcoming IPOs, especially in tech and fintech, pricing discipline is becoming a more dominant factor than brand popularity.

Pre-IPO investors understand:

Overpriced IPOs struggle after being listed, no matter how strong the brand is. Selling early to decrease risk exposure is a sensible strategy. Does this mean a PhonePe IPO is risky? Not necessarily.

In fact, it’s critical to distinguish business qualityfrom investor exit behaviour. PhonePe certainly continues to enjoy:

• Market leadership in UPI
• Strong ecosystem partnerships
• A deep-pocketed global parent
• Several potential monetisation avenues (lending, insurance, wealth, etc.).

The pre-IPO sell-off, however, signals valuation sensitivity, which in this case indicates more business weakness than anything else.

What Should Retail Investors Take Away From This?

Investors following the PhonePe IPO news have an added advantage in this case, paying attention to three significant factors. 

Firstly, investor exits are not negative indicators. These are often more the result of portfolio strategy than a loss of commitment.

Secondly, the IPO valuation is more critical than brand popularity. A solid company can be a terrible investment if an aggressive valuation is placed on it.

Third, fintech IPOs take time, and all stakeholders need to have the right expectations. Profitability for all actors takes time and regulated platforms require time.

 

 

Final Verdict: Smart Money Is De-Risking, Not Running Away

The ₹10,000 crore pre-IPO share sale is not a panic move, but a strategic de-risking by smart money who have pocketed more than mere peanuts. Concerning the PhonePe IPO, the better question is not why investors are selling, but rather: To what valuation will PhonePe strike a reasonable risk-reward balance for new investors? As the IPO approaches, this question will be more significant than any other consideration before the headlines.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.