When an IPO hits the market, almost all the attention goes to the company.
How much money is it raising? What is the IPO valuation? Is the issue oversubscribed? What will be the listing gain? And, of course, the big question: Should you subscribe or stay away?
But behind every IPO is another interesting business story that gets far less attention.
Before a company can raise money from public investors, list its shares on the stock exchange and make them available for trading, an entire financial infrastructure has to swing into action. Investment bankers, registrars, lawyers, auditors, stock exchanges, depositories and several other intermediaries all play their part.
And most of them get paid irrespective of what eventually happens to the share price.
Welcome to the business of the stock-market middlemen — the companies that can make money from the activity surrounding the market without necessarily betting on which stock will go up or down.
1. The IPO Setup: Getting a Company Ready for Dalal Street
Taking a company public isn’t as simple as deciding to sell some shares and opening the issue to investors.
An IPO involves months of preparation, regulatory filings, due diligence, valuation discussions, investor marketing, application processing and coordination among numerous parties.
And all of this costs money.
Investment Bankers: The Architects of the IPO
Merchant bankers and investment banks such as Kotak Mahindra Capital and JM Financial can play a central role in bringing an IPO to market.
They help structure the offering, prepare the company for regulatory scrutiny, coordinate documentation, advise on valuation and pricing, market the issue to institutional investors and manage the overall IPO process.
For large IPOs, multiple investment banks may be appointed as book-running lead managers.
Naturally, this expertise comes at a price.
Depending on the size and complexity of the offering, IPO-related expenses can run into several crores. The larger the issue, the bigger the opportunity for the ecosystem servicing it.
And notice the difference between the investment banker and the investor.
The investor makes money only if the investment works out.
The banker gets paid for successfully executing the transaction.
2. Registrars: The Machinery Behind Millions of Applications
When millions of investors apply for a popular IPO, somebody has to process all those applications.
That’s where IPO registrars come in.
Companies such as KFin Technologies and MUFG Intime India — formerly Link Intime India — operate behind the scenes handling crucial parts of the issue.
They help process applications, coordinate allotments, deal with investor records and facilitate the crediting of shares and related activities.
Retail investors may barely notice them unless they are anxiously checking their IPO allotment status.
But every large public issue creates work for this infrastructure.
That makes registrars an interesting example of the “picks and shovels” business model.
During a gold rush, instead of searching for gold yourself, sometimes it can be more profitable to sell equipment to thousands of people searching for it.
The same idea can apply to capital markets.
Instead of trying to predict which IPO will become the next multibagger, some businesses earn money by providing the infrastructure required for IPOs to happen in the first place.
3. Lawyers and Auditors: The Compliance Gatekeepers
An IPO also creates an enormous amount of legal and financial paperwork.
Financial statements must be examined. Risk factors need to be disclosed. Corporate structures have to be reviewed. Regulatory requirements must be satisfied.
That means lawyers, auditors and other professional advisers become an essential part of the process.
The company isn’t merely selling shares.
It is moving from being privately held to operating under the much greater scrutiny that comes with having thousands — sometimes millions — of public shareholders.
That transition creates a substantial compliance industry around listed companies.
And importantly, many of these costs don’t disappear once the IPO is over.
4. Listing Isn’t Free: The Recurring Revenue Begins
Ringing the proverbial listing bell isn’t the end of the expenses.
In some ways, it is only the beginning.
Once listed, companies have continuing obligations toward stock exchanges, regulators, shareholders and corporate-governance standards.
Stock exchanges such as BSE and NSE levy listing-related charges based on their applicable fee structures.
Unlike the one-time revenue generated around an IPO, listing fees can provide recurring revenue.
Think about the economics.
One IPO generates fees during the listing process.
But once the company becomes part of the listed universe, it can remain there for decades.
That potentially turns a one-time customer into a long-term participant in the capital-market ecosystem.
5. Auditors, Directors and Compliance: The Annual Cost of Being Public
Public companies also have ongoing governance and compliance expenses.
Auditors need to examine financial statements. Independent directors and board members have responsibilities that need to be fulfilled. Companies need compliance teams, investor-relations functions and various professional services.
Quarterly results have to be prepared and disclosed. Shareholder communications must be maintained. Material developments have to be reported.
In other words, an IPO doesn’t simply create a publicly traded stock.
It creates a permanent compliance ecosystem around the company.
For businesses providing those services, India’s growing number of listed companies can therefore create recurring opportunities.
6. CDSL and NSDL: The Infrastructure You Rarely See
Then come two particularly interesting pieces of India’s stock-market infrastructure: the depositories.
India’s securities depository system is primarily built around CDSL and NSDL.
Before dematerialisation, investors dealt with physical share certificates, paperwork, transfer forms and the risks associated with lost or fraudulent certificates.
Today, ownership exists largely as electronic records.
Depositories provide the infrastructure that makes this possible.
When securities are created and held in dematerialised form, depositories and their participants become part of the machinery connecting companies, brokers and investors.
Various issuer, account-maintenance and transaction-related charges can arise across this ecosystem depending on the service and intermediary involved.
The broader point is more important than any individual fee:
More investors + more demat accounts + more securities + more transactions = more activity flowing through market infrastructure.
7. The Beautiful Economics of a Toll-Road Business
This is where the investment case around financial-market infrastructure becomes particularly interesting.
Imagine owning a toll road.
You don’t particularly care whether the person driving through it is travelling to make a profitable business deal or returning home after losing money.
Your economics depend primarily on traffic.
Some capital-market businesses have characteristics that resemble this model.
A trader may buy a stock at ₹500 and sell it at ₹300.
Another investor may buy the same stock at ₹300 and eventually sell it at ₹1,000.
Their financial outcomes are completely different.
But both transactions still require market infrastructure.
That is why businesses such as exchanges, depositories, registrars, brokers, clearing corporations and other intermediaries deserve attention as a separate category from the companies whose shares trade through them.
When Markets Boom, the Cash Registers Get Busier
Bull markets can make this ecosystem particularly powerful.
When markets rise, more companies want to launch IPOs.
Successful listings attract more companies.
More IPOs attract more retail investors.
More investors create more demat accounts.
More demat accounts can generate more trading activity.
Higher activity attracts brokers and financial-product providers.
The entire ecosystem can reinforce itself.
India’s increasing financialisation — the movement of household savings toward equities, mutual funds and other financial assets — therefore creates opportunities not only for fund managers and investors but also for the companies supplying the underlying infrastructure.
But Do the Middlemen Really “Always Win”?
The phrase makes for a great headline, but investors should add an important qualification.
These businesses aren’t risk-free.
Transaction volumes can fall during prolonged bear markets. IPO activity can dry up. Regulatory changes can reduce fees. Competition can put pressure on pricing. Technology requires continuous investment. A business heavily dependent on a particular segment can suffer when that segment slows.
And perhaps most importantly, a wonderful business can still be a terrible investment if you pay an absurd valuation for it.
A company may have recurring revenue, high margins, strong cash generation and an enviable competitive position.
None of that automatically makes its stock cheap.
Investors therefore need to separate two questions:
Is this a great business?
and
Is this a great business at a sensible price?
They are not the same thing.
Don’t Just Study the Gold Miners. Study Who Sells the Shovels.
Whenever the next blockbuster IPO arrives, most investors will naturally focus on the company getting listed.
But there is another question worth asking:
Who gets paid because this IPO is happening?
Investment bankers help bring the company to market. Registrars process the issue. Lawyers and auditors handle critical regulatory work. Exchanges provide the marketplace. Depositories maintain the electronic infrastructure that allows securities to exist and move efficiently.
The fortunes of an individual IPO can vary enormously.
Some stocks double.
Some go nowhere.
Some collapse.
But the infrastructure surrounding India’s capital markets continues operating through all of them.
That leads to a useful investing lesson.
Sometimes the most interesting opportunity isn’t the company joining the stock market.
It may be the company collecting the toll every time somebody enters it.
The Takeaway
Investors take market risk. Companies take business risk. Traders take price risk.
The financial infrastructure providers operate differently: many earn fees from issuance, listing, compliance, custody, processing or transactions.
That doesn’t mean they literally win every time, nor does it make their stocks automatic buys. Competition, regulation, market cycles and valuation still matter enormously.
But as India’s equity culture expands, there is a compelling reason to look beyond the stocks everyone is trading and examine the businesses that make all that trading possible.
In a gold rush, everyone looks for gold. Smart investors also study who owns the toll road — and who is selling the shovels.
