An Initial Public Offering (IPO) is an important milestone for a company that wants to raise money from the public and get its shares listed on a stock exchange. For investors, an IPO provides an opportunity to purchase shares of a company before they begin regular trading on the stock market.
In India, IPOs attract considerable attention from retail investors, experienced traders, and long-term investors. However, many beginners are unfamiliar with the IPO application process, share allotment, pricing, and listing.
This guide explains what an IPO is, how it works in India, how to apply for one, and what investors should understand before investing.
What Is an IPO?
An Initial Public Offering (IPO) is the process through which a privately held company offers its shares to the public for the first time.
Before an IPO, a company may be owned by its founders, promoters, private investors, and other shareholders. After completing the IPO process and getting listed, its shares can be traded on a recognised stock exchange, subject to applicable regulations.
For example, suppose a company wants to expand its manufacturing operations, repay debt, or finance new projects. It may decide to offer shares to the public through an IPO to raise the required funds.
Investors who receive shares through the IPO become shareholders of the company. Their investment value can increase or decrease depending on the company’s performance and market conditions.
How Does an IPO Work in India?
The IPO process involves several stages, starting with the company’s decision to go public and ending with the listing of its shares on a stock exchange.
- The Company Decides to Go Public
A company may decide to launch an IPO to raise capital, provide an exit opportunity to existing shareholders, or establish a public market for its shares.
The company appoints intermediaries, including merchant bankers, who assist with the issue preparation, regulatory compliance, pricing, and listing process.
- Filing of the DRHP
The company prepares a Draft Red Herring Prospectus (DRHP), which contains important information about its business, financial performance, management, risks, and proposed public offering.
The draft is submitted to the Securities and Exchange Board of India (SEBI) for review, where applicable.
Investors can use the DRHP to understand the company’s business model, financial position, and potential risks before making an investment decision.
- IPO Price Band Is Announced
For a book-built IPO, the company announces a price band within which investors can submit their bids.
For example, if an IPO has a price band of ₹100 to ₹120 per share, investors can generally bid within this range.
The final issue price is determined through the book-building process, based on investor demand and the applicable pricing mechanism.
- IPO Subscription Opens
Once the IPO opens, eligible investors can apply for shares during the subscription period.
Applications are submitted through the ASBA (Application Supported by Blocked Amount) process, commonly using a bank’s IPO facility or an eligible broker’s platform.
Investors provide their PAN, demat account details, bid quantity, and other required information.
- IPO Allotment Takes Place
After the subscription period closes, the company and its intermediaries finalise the basis of allotment.
If an IPO receives more applications than the available shares, it is considered oversubscribed. In such cases, an applicant may receive fewer shares than requested or no shares at all.
Investors can check their allotment status through the IPO registrar or the relevant stock exchange’s website.
- Shares Are Listed on the Stock Exchange
After the allotment process, the shares are credited to the demat accounts of successful applicants.
The company then completes the listing process, and its shares become available for trading on the designated stock exchange.
Investors who receive shares through the IPO can decide whether to continue holding them or sell them after trading begins, subject to applicable rules.
Types of IPOs in India
There are two common types of IPO share offerings.
Fresh Issue
In a fresh issue, the company issues new shares to investors and receives the proceeds from their sale.
The money may be used for business expansion, capital expenditure, debt repayment, or other purposes disclosed in the offer document.
Offer for Sale (OFS)
In an offer for sale, existing shareholders sell some of their shares to the public.
The proceeds from these shares go to the selling shareholders rather than the company.
Some IPOs include both a fresh issue and an offer for sale.
How to Apply for an IPO in India
Retail investors can generally apply for an IPO through a supported bank or stockbroker platform.
The basic application process is as follows:
- Open an eligible demat and trading account, if you do not already have one.
- Visit your broker’s IPO section or use your bank’s IPO application facility.
- Select the IPO you want to apply for.
- Enter the required quantity and bid price, or select the cut-off option if available to you.
- Provide the required application and payment details.
- Approve the UPI mandate or complete the applicable ASBA process within the deadline.
- Check your application status after the issue closes.
Under ASBA, the application amount is blocked in your bank account rather than immediately transferred to the company. If shares are allotted, the required amount is debited. If no shares are allotted, the blocked amount is released.
Investors should always check the current application requirements, eligibility conditions, and deadlines before submitting a bid.
What Is IPO Allotment?
IPO allotment is the process of distributing the shares offered in an IPO among eligible applicants.
Allotment depends on the issue’s structure, the investor category, the number of shares available, and the number of valid applications received.
For example, if a retail IPO receives applications for more shares than are available, not every applicant will necessarily receive an allotment.
Applying for a larger quantity does not automatically guarantee that an investor will receive shares. The allotment process follows the applicable regulatory framework and the basis of allotment disclosed for the issue.
What Happens After an IPO Listing?
Once a company’s shares are listed, investors can buy and sell them through the stock exchange during trading hours.
The listing price may be higher or lower than the IPO issue price. This depends on market demand, investor expectations, company fundamentals, and broader market conditions.
For example, if an investor receives shares at ₹120 and the stock lists at ₹150, the investor has an unrealised gain of ₹30 per share before transaction costs and applicable taxes.
However, if the stock lists below ₹120, the investment may show a loss.
A listing gain is not guaranteed, and the share price can change significantly after trading begins.
Important Things to Check Before Investing in an IPO
Before applying for an IPO, investors should review the company’s offer document and consider the following factors:
- Business model: Understand how the company earns revenue and what products or services it offers.
- Financial performance: Review revenue, profits, debt, cash flow, and historical financial trends.
- Valuation: Compare the IPO pricing with the company’s financial performance and relevant listed competitors.
- Use of proceeds: Check how the company intends to use the money raised through the issue.
- Risk factors: Read the risks disclosed in the DRHP or RHP, including legal, operational, financial, and industry-specific risks.
- Promoter and management background: Review the information disclosed about the company’s leadership and existing shareholders.
An IPO should not be evaluated only on the basis of its popularity, subscription figures, or grey market premium. These indicators do not guarantee future returns.
Conclusion
An IPO allows a company to offer shares to the public and gives investors an opportunity to become shareholders. In India, the process includes regulatory disclosures, pricing, subscription, allotment, and stock exchange listing.
Before applying for any IPO, investors should understand the company’s business, financial position, valuation, and disclosed risks. Careful research and an understanding of the application process can help investors make informed decisions in the Indian stock market.
Disclaimer: This article is for educational purposes only and does not constitute investment advice or a recommendation to apply for any IPO.
