One Model Many Worlds: The Inadequacy of CAPM for Indian IPO Valuation

The Capital Asset Pricing Model has historically served as a fundamental instrument in financial economics, establishing a straightforward nexus between systematic risk exposure and anticipated returns. However, its implementation within India’s initial public offering ecosystem exposes critical inadequacies. This investigation scrutinizes CAPM’s conceptual and empirical shortcomings when applied to Indian IPO contexts, with particular emphasis on the 2021 public listings of Zomato and Paytm. Through integrated analysis of regulatory documents, market performance metrics, and scholarly literature, this study demonstrates that CAPM’s foundational premises—including market efficiency, homogeneous investor expectations, and singular risk representation—collapse under India’s institutional realities characterized by information disparities, liquidity frictions, and behavioral anomalies. Empirical estimation reveals standard CAPM generates cost-of-equity figures between 13-15%, whereas Damodaran’s country-risk-adjusted variant produces more defensible estimates of 16-18%, demonstrating superior alignment with observed market corrections. The research advances a synthesized valuation architecture combining quantitative adjustments (incorporating country premiums, liquidity factors, downside risk metrics) with qualitative dimensions (governance assessment, sentiment analysis, regulatory compliance). This integrated approach enhances precision in emerging market contexts while acknowledging CAPM’s pedagogical utility alongside its practical obsolescence for Indian IPO pricing.