First, what exactly is IRFC?

IRFC isn't a company that builds railways or runs trains. Its role is quieter but arguably more critical. It is the dedicated financing arm of Indian Railways, raising capital from domestic and overseas markets and channelling it toward asset creation. Locomotives, wagons, tracks, and infrastructure, much of it gets funded through IRFC's balance sheet. Think of it as Indian Railways' in-house bank, except it borrows at sovereign-adjacent rates and has exactly one client.

The IPO in January 2021 at ₹26 per share captured this reliability well. The stock peaked at ₹229 in July 2024, a near ninefold return in three years. Since then, it has corrected sharply, trading around ₹103 to ₹105 this week, more than 50% below its all-time high.

Why Is the Government Selling Now?

The answer to this question is more about compliance and less about strategy and more about compliance.

SEBI, through the Securities Contracts (Regulation) Rules, 1957 (SCRR), mandates minimum public shareholding requirements for all listed companies. The rules are structured around post-issue market capitalisation. For large issuers with a market cap exceeding ₹1,00,000 crore, the requirement is to offer at least ₹5,000 crore and a minimum of 5% to public shareholders at the time of listing. Crucially, if a company does not achieve 25% public shareholding at listing, it must bring public shareholding to at least 10% within two years and to 25% within five years from the date of listing.

IRFC was listed in January 2021. Five years have passed. The clock has run out.

The government currently holds 86.36% of IRFC, leaving only 13.64% in public hands, well short of the 25% threshold the rules demand. At the OFS floor price of ₹104, that excess stake of 11.36% above the permissible limit is worth over ₹14,000 crore. The government has a long divestment road ahead, and this OFS is only the first step.

How Was the Sale Structured?

The government proposed a base offer of 2%, along with what is called a greenshoe option for an additional 2%.

A greenshoe option, in simple terms, is a built-in flexibility mechanism for the seller. When an OFS is announced, the seller can designate an additional tranche of shares that will only be released into the market if demand from investors is strong enough to absorb them comfortably. It is named after the Green Shoe Manufacturing Company, which first used this mechanism in 1919. Think of it as the government saying, "We plan to sell 2%, but if investors want more, we are ready to sell another 2% on top." The greenshoe protects both sides. Investors get assurance that the seller will not flood the market with more shares than demand can support. The seller gets an opportunity to raise more capital if sentiment is favourable.

In IRFC's case, had the greenshoe been fully subscribed at the floor price, the government would raise over ₹5,400 crore in total.

What Actually Happened

The offer opened for institutional investors on February 25. There was an undersubscription of 1.18 crore equity shares on the first day, which is precisely what triggered the government's decision not to exercise the greenshoe. In its exchange filing, IRFC confirmed that the total offer size would remain at the base offer of 26.13 crore equity shares, representing 2% of the company's outstanding shares.

Of this, 3.79 crore shares, representing 14.52% of the total offer, were made available for retail investors when subscription opened on February 26. The portion reserved for non-retail investors was subscribed 95% on the first day.

Meanwhile, IRFC's share price fell 4.6% on February 25, closing at ₹104.49, almost exactly at the OFS floor price. The market was pricing in the dilution in real time.

Should Retail Investors Have Applied?

Here is a snapshot of why the participation case was weak: