Case 038Exits and secondariesCore
Dukanvik Retail Tech lists at Rs 5,000 crore post-issue with a Rs 600 crore fresh issue and a Rs 400 crore offer for sale. Your fund holds 9% before the issue. How much can you sell, what do you own after listing, and what does the lock-up mean for your realised multiple?
1The situation
Dukanvik Retail Tech, which sells billing and inventory software to kirana stores, is listing on an Indian exchange. The issue values it at Rs 5,000 crore after the issue. It has two parts: a fresh issue of Rs 600 crore of new shares, whose money goes to the company, and an offer for saleThe part of an IPO in which existing shareholders sell their own shares to the public. The money goes to the sellers, not the company, and no new shares are created. of Rs 400 crore, in which existing investors sell.
Your fund bought 9% for Rs 60 crore years ago, as preference shares that convert to equity before the offer document is filed. Selling investors together hold 40% before the issue and have agreed to split the offer for sale in proportion to their holdings. Pre-IPO shares not sold are subject to a lock-up after listing; the length and exemptions depend on the holder type and on SEBI's current rules, which you should confirm.
2Your task
How much can the fund sell in the offer for sale, what does it own after listing, and how does the lock-up change the multiple you can actually book?
Quick check
Before selling anything, what does the fresh issue do to the fund's 9%?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The fund can sell about Rs 90 crore in the offer for sale and keeps 6.12% after listing. The fresh issue first dilutes its 9% to 7.92%, worth Rs 396 crore at the issue price. Its 22.5% share of the offer for sale is Rs 90 crore of cash, 1.5x its cost. The other Rs 306 crore is locked up and still at market risk, so the headline 6.6x is not yet a realised multiple.
Step 1What does each part of the issue do to the fund?
Think of a family business taking in a new partner who brings fresh money, while an uncle sells part of his share to an outsider at the same time. The new partner's money makes the pie bigger and shrinks everyone's slice; the uncle's sale changes who owns his slice but not the size of the pie. A fresh issue dilutes every existing holder; an offer for sale dilutes nobody and turns some existing shares into cash for the sellers.
The company is worth Rs 4,400 crore before the issue and Rs 5,000 crore after Rs 600 crore of new money. The fund's 9% of Rs 4,400 crore is Rs 396 crore, which is 7.92% of Rs 5,000 crore. The selling investors hold 40% and split the Rs 400 crore sale in proportion, so the fund's share is 9 over 40, 22.5%, Rs 90 crore of shares sold for cash at listing. It keeps Rs 306 crore of shares, 6.12% of the company.
Step 2Why is the headline multiple not the realised one?
At the issue price the fund's stake is worth Rs 396 crore on a Rs 60 crore cost, 6.6x. But only Rs 90 crore is cash on day one, 1.5x the cost. The rest is locked up, and the fund carries the share price risk until it can sell, so the multiple it reports to its LPs as distributed is 1.5x, not 6.6x. LPs measure distributions, often as DPIDistributions to paid-in capital: cash actually returned to LPs divided by the capital they put in. It counts only money paid out, not the value of shares still held., because paper value can move.
| Share price by the end of the lock-up | Locked stake, Rs cr | Plus OFS cash, Rs cr | Total multiple on Rs 60 cr |
|---|---|---|---|
| -30% from issue price | 214.2 | 304.2 | 5.07x |
| Flat at issue price | 306.0 | 396.0 | 6.60x |
| +20% from issue price | 367.2 | 457.2 | 7.62x |
Step 3Could the fund sell more, and should it?
It could ask. The size of the offer for sale and its split are negotiated among sellers and the bankers, who watch how much selling the market will absorb, since a large investor exit can read as a lack of confidence. A fund near the end of its life may push for a bigger share of the sale; a fund that believes in the company may sell less and accept the lock-up risk. Eligibility to sell in an offer for sale and the lock-up period both depend on rules about how long the shares were held and what kind of holder you are; check the current SEBI regulations rather than relying on a remembered number.
The view to close on: the IPO is the start of the exit, not the end. Plan the sale of the locked stake before listing, through block trades after the lock-up or a staged sell-down, and report the realised and unrealised parts separately. The limitation of this model is that it ignores IPO fees and taxes on the sale, which reduce the cash the fund receives.
Where candidates lose it
The common loss is forgetting the fresh issue and saying the fund owns 9% minus what it sold. New shares dilute everyone first; the fund owns 6.12% after listing, not 7.2%.
The second is quoting 6.6x as the outcome. Until the locked shares are sold, most of that multiple is a mark, and LPs judge the fund on cash returned.
What the interviewer asks next
- The bankers cut the offer for sale to Rs 250 crore. What does the fund sell and keep?
- How would you sell a 6% stake after the lock-up without moving the share price?
- Why might the company prefer a larger fresh issue and a smaller offer for sale?
Company names and figures are illustrative.