What is IPO (Initial Public Offering)?
An Initial Public Offering (IPO) is when a private limited company offers its shares to the Retail public for the first time on a stock market. It’s essentially the company’s debut on the stock market, transitioning from private limited company to public limited company.
Imagine you own a successful, growing private clothing manufacturing company. You’re doing great, but to open 5 new manufacturing units across the country, you need a lot of money. Instead of taking a massive loan (which you’d have to repay with interest), you decide to sell a part of your company ownership to the public.
This process of a private company transforming into a public company by selling its shares to the general public for the first time is called an Initial Public Offering (IPO).
How IPO Work
When a Private company decides to become a “Public Company,” it works with investment banks (called underwriters) to determine the initial share price and manage the IPO process. The company issues new shares, and investors can buy these shares, providing capital to the company in exchange for partial ownership.
Why Company Launched IPO?
Companies launch an IPO primarily for two reasons:
- Fresh Issue (To Raise Capital for Growth): The money raised is used for expanding the business, building new factories, paying off debt, funding research, or acquiring other companies. This money goes directly to the company.This is the main reason.
- OFS (Offer for Sale): Early investors, like founders, venture capitalists, or foreign investors, might want to sell a part of their holdings to cash out their investments. In this case, the money goes to these selling shareholders, not to the company.
Often, an IPO is a combination of both a Fresh Issue and an Offer for Sale.
Key Players in an Indian IPO
- Company: The private company that wants to go public company (e.g., a startup or a well-established company).
- Investment Banks (Lead Managers/Book Running Lead Managers – BRLMs): These are the experts (like Kotak Mahindra Capital, ICICI Securities, SBI Capital, etc.) who manage the entire IPO process. They help decide the initial share price, create the offer document, and market the IPO to investors.
- Securities and Exchange Board of India (SEBI): The stock market regulator. SEBI’s role is to protect investor interests and ensure the company provides all necessary and verified information. No company can launch an IPO without SEBI’s approval.
- Stock Exchanges: The platforms where the shares are listed and traded after the IPO (e.g., National Stock Exchange and Bombay Stock Exchange).
- Investors:
- Retail Individual Investors (RIIs): Individual investors who can apply for shares worth up to ₹2 lakhs.
- Non-Institutional Investors (NIIs): Individual investors who apply for more than ₹2 lakhs or small corporates. They don’t get quota reservations like RIIs.
- Qualified Institutional Buyers (QIBs): Big professional investors like mutual funds, insurance companies, and foreign institutional investors (FIIs).
| Advantage | Disadvantage |
| If investors get shares of a good company at a good price, listing gains can be higher.Investors get a lot of money on listing gains. | If investors get shares of a Good/Bad company at a higher price of a company valuation , the price can fall below the IPO price on listing day. Investors can lose money. |
| As a public company, it must disclose its financials regularly, increasing transparency. | Promoters’ shares are often locked in for a period. After this, a high number of shares can hit the market, lowering the price. |
| Investors get a chance to buy into the very strong fundamentals and financials of a company early in its growth story. | Sometimes, IPOs are overhyped. The market price may not reflect the company’s true fundamental value. |
| After listing a company in a stock exchange, you can easily buy or sell the shares on the stock exchange. | If fundamental and financials of a company IPOs are very strong, the oversubscription is very huge , making it a lottery.Chances of allotment are very low. |
The IPO Process in India.
1: Hiring an Investment Bank
The company appoints investment banks to manage the offer. They are the underwriters,to determine the initial share price and manage the IPO process.
E.g of investment bank-SBI Capital market,ICICI Securities Limited,Axis Capital Limited
2: Drafting the Red Herring Prospectus (DRHP)
This is the most critical document. It’s a detailed booklet filed with SEBI that contains everything about the company:
- Its business model, strengths, and risks.
- How it plans to use the raised money
- The objects of the offer.
- Detailed financial statements for the last 3-5 years.
- Information about the promoters and management.
- This document is publicly available on SEBI’s and the investment bank’s websites. Always read it before investing.
3: SEBI Review & Approval
SEBI reviews the DRHP to ensure all disclosures are adequate and there is no misleading information. Once satisfied, it gives approval to proceed with an IPO Process. .
4: Marketing the IPO-
Company management meets institutional investors, fund managers, analysts.
Presentations highlight business model, growth potential, and valuation.Builds confidence among large investors (anchor, QIBs).For retailers ads in TV, newspaper, magazines about IPO dates,offer price,benefits etc.Outdoors branding like hoardings, posters. In Today’s new generations public awareness about IPO through social media marketing.
5: Price Band and Lot Size
The company announces a price band (e.g., ₹450 to ₹480 per share). This is the range within which investors can bid. They also announce the lot size, which is the minimum number of shares you can apply for (e.g., 15 shares per lot). Investors cannot bid for 16 shares;Investors always bid in lots.Investors have to bid for 15, 30, 45, etc.
6: The Application/Bidding Period (Usually 3-4 Business Days)
This is the time an investor can apply for the IPO.Investors can apply to the IPO through their Trading/Demat account or net banking.
7: Allotment of Shares
After the bidding closes:
- If the IPO is oversubscribed, bidding of the shares are more than company issued shares, the allotment is done through a computerized lottery.
- Retail investors (applying for <₹2 Lakh) have a reserved quota, which increases their chances of allotment in a fair manner.
- If it’s undersubscribed, everyone who applied gets the shares.
8: Listing Day
After the allotment, the shares are credited to your Demat account. Typically, within 3-4 days of the IPO closing, the shares are listed on the stock exchanges (NSE/BSE). On this day, trading of the company’s shares started publicly on the stock exchanges. The price can be significantly higher or lower than the IPO price based on market demand.
How Can a Retail Investor Apply for an IPO in India?
You need three things:
- A Demat/Trading Account:Through brokerage apps (like Zerodha, Groww, Upstox, etc.).
- A Bank Account:Using ASBA (Application Supported by Blocked Amount) via net banking.
Most brokers and banks integrate the application process into their trading platforms or net banking sites, making it very simple.
Beginner’s Guide to IPO (Initial Public Offerings)
An IPO is an exciting way to participate in a company’s growth journey. However, it is not a guaranteed way to make money.
Before you apply, always:
- Read the RHP (Red Herring Prospectus) to understand the company’s business.
- Analyze the company’s financials and Fundamentals (revenue, profit, debt,assets,).
- Understand the objective of IPO– how will they use your money?
- Check the valuation – is the offered price reasonable compared to its peer company?
- Never invest based on hype or grey market premiums.
Start small, do your own research or consult a financial advisor.
DISCLAIMER
The information provided on this website is strictly for educational and informational purposes only. We do not recommend any specific investments.
All content, including but not limited to articles, analysis, market updates, IPO information, stock recommendations, and financial data, should not be construed as personalized investment advice or solicitation to buy or sell any securities.
We are not SEBI registered advisors. This content is for informational and educational purposes only and should not be considered as investment advice.
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