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 and seeks to list them on a stock exchange. In India, investors can apply for shares during the IPO subscription period, subject to the offer terms and applicable rules. An IPO can help a company raise capital, but shares may rise or fall in value after listing.
Eligible investors who wish to apply for an IPO can review the offer details, including the price band, lot size, subscription dates, and risk factors, before submitting an application through an authorised platform using a permitted application method. Applying for an IPO does not guarantee share allotment, as allotment depends on the issue demand and applicable rules.
IPO Meaning and Definition
An IPO, or Initial Public Offering, is a company’s first public offering of shares. It marks a transition from private ownership to public shareholding. After listing, investors can generally buy and sell the shares on a stock exchange, subject to market conditions and applicable rules.
Before an IPO, a company is privately held by a small group of founders, investors, or employees. Once a company goes public, its shares are listed on a stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India, making them available for trading by the public.
Types of IPOs
IPOs can be classified based on how the offer price is determined and how the shares are offered.
Based on Pricing Method
Fixed Price Offering: In this, the company fixes a particular price for every share prior to the opening of the IPO for subscription. This price is clearly mentioned in the offer document. Investors know exactly how much they need to pay when applying. The payment has to be made in full at the time of the application. This type is simple for beginners, but the demand for shares is only known after the issue closes.
Book Building Offering: In this, rather than fixing a particular price, the company declares a price band, including a floor price (the lowest price) and a cap price (the highest price). The investors can tender bids for the quantity of shares they wish and at the price at which they are willing to pay within that zone. Once the bidding period ends, the final price is decided based on demand. This method is more flexible and gives the company a better chance to find the correct market value for its shares.
Based on Issue Structure
Fresh Issue: The company issues new shares and receives the proceeds, subject to the offer terms.
Offer for Sale (OFS): Existing shareholders sell some of their shares, and the sale proceeds go to those selling shareholders.
Fresh Issue and OFS: An IPO may include both structures. Review the offer document to understand the issue structure and use of proceeds for a specific IPO.
Read More: Types of IPO with Example
How does an IPO Work?
An IPO involves two connected processes: the company prepares and launches the offer, and investors apply for shares during the subscription period. The exact process, timelines, and allotment method are set out in the offer documents and applicable rules.
Company Prepares the IPO
The company appoints intermediaries such as lead managers, legal advisers, registrars, and underwriters. It prepares the required offer documents, which include information about the business, financials, proposed use of proceeds, capital structure, and risk factors.
The issuer files the offer document in the prescribed format with the Securities and Exchange Board of India (SEBI), the stock exchanges, and the Registrar of Companies (ROC). After receiving and addressing regulatory observations, the issuer may open the offer for public subscription within the stipulated timelines.
Price and Issue Structure are Decided
The company decides whether to offer shares at a fixed price or through book building. In a fixed-price issue, the offer price is specified in advance; in a book-building issue, investors bid within a disclosed price band and the final issue price is determined based on demand at different price levels.
An IPO may include a fresh issue, an Offer for Sale (OFS), or a combination of both. In a fresh issue, the company issues new shares and receives the proceeds; in an OFS, existing shareholders sell their shares and receive the proceeds.
Investors Apply for Shares
Eligible investors review the offer documents and submit their applications during the subscription period. Applications may be made through ASBA, UPI as a payment mechanism where applicable, or other permitted modes, subject to the offer terms.
With ASBA, the application amount is blocked in the investor’s bank account rather than immediately transferred. The amount remains in the account until allotment; the amount corresponding to allotted shares is debited, while the remaining amount is released for investors who do not receive an allotment.
Allotment and Listing
After the subscription period closes, the company, lead managers, registrar, and stock exchanges finalise the basis of allotment. If an issue is oversubscribed, shares may be allotted proportionately or through a lottery system, depending on the applicable rules and the investor category.
Allotment details are communicated to applicants and can generally be checked through the registrar to the issue. Once the post-issue process is completed, the shares are credited to successful applicants’ demat accounts and begin trading on the stock exchange where they are listed.
After Listing
After listing, investors can generally buy or sell the shares in the secondary market through a stock exchange. The share price after listing may be higher or lower than the IPO issue price and can change based on demand, market conditions, and other factors.
Also Read: How IPOs Work: A Step-by-Step Guide to Company Listing
Terms Associated With an IPO
Understanding key terms related to an IPO can help you make informed decisions when considering an investment. Here are some essential terms associated with IPOs:
| Term | Meaning |
|---|---|
| Issuing Company | The company going public by offering its shares to the public for the first time. It is also known as the issuer. |
| Underwriter | An investment bank or financial institution that helps the issuing company set the IPO price, markets the shares to investors, and supports the IPO launch. |
| Red Herring Prospectus (RHP) | A preliminary document filed by the issuing company with SEBI. It contains details about the company, its financials, and risks involved, helping investors understand the offering before making a decision. |
| Price Band | The range within which investors can place bids for shares. The final price is determined within this range, depending on demand. |
| Lot Size | The minimum number of shares an investor must bid for when applying for an IPO. Investors cannot buy less than the specified lot size. |
| Book Building Process | In a book-building IPO, investors place bids for shares within a specified price range. The underwriter collects these bids and determines the final issue price based on demand. |
| Cut-Off Price | For eligible retail investors, the cut-off price option allows them to apply without specifying a particular price within the price band. They agree to pay the final price decided during book building. |
| Allotment | The process of allocating shares to investors once the IPO bidding period ends. Shares are distributed based on demand and the type of investor. |
| Oversubscription | When demand for an IPO exceeds the number of shares offered. Shares may be allocated on a pro-rata basis or through a lottery system, depending on the applicable rules. |
| Listing | Once shares are allotted, they are listed on a stock exchange, such as the NSE or BSE, where investors can buy and sell them in the open market. |
| Fresh Issue | New shares issued by the company; the company receives the proceeds, subject to the offer terms. |
| Offer for Sale (OFS) | Shares sold by existing shareholders; the selling shareholders receive the proceeds. |
| ASBA | Application Supported by Blocked Amount. The application amount is blocked in the investor’s bank account until allotment. |
| UPI Mandate | A UPI-based approval mechanism that allows eligible investors to authorise payment for an IPO application. |
IPO Eligibility Criteria
IPO eligibility and compliance depend on the applicable rules and the route used by the company. A company’s offer documents set out relevant disclosures and risks. Readers should consult current offer documents and official regulatory information for the applicable criteria.
A company preparing to issue an IPO generally needs to:
- Comply with the Companies Act, 2013 and applicable SEBI regulations.
- Meet the eligibility conditions applicable to its chosen issue route.
- Comply with disclosure, governance, and investor-protection norms.
- Appoint key intermediaries such as investment bankers, underwriters, and legal advisers.
- Conduct financial and legal due diligence to ensure compliance.
- Prepare and submit a Draft Red Herring Prospectus (DRHP) to SEBI for review.
- Obtain Board and shareholder approval through a special resolution, where required.
- Decide the IPO pricing with the lead manager based on market conditions.
- Run marketing and advertising campaigns to generate investor interest.
- Sign a listing agreement with the stock exchanges.
- Complete share allotment and release of excess application money.
- List the shares on stock exchanges for public trading.
Read More: How to Meet the IPO Eligibility Criteria?
Key Factors That Impact IPO Performance
Before investing in an IPO, it is important to understand the key factors that affect how the stock performs after listing. This helps you make better investment decisions:
Company Fundamentals: A company’s financial strength, business model, and growth prospects shape its long-term success.
Market Conditions: The overall market environment and sector trends at the time of listing influence demand and pricing.
Lock-Up Period: Some insiders and early investors may be restricted from selling shares immediately after the IPO. This can affect the number of shares available for trading, but it does not guarantee a stable or higher share price.
Waiting Period: The period between applying for an IPO and the shares becoming tradable affects liquidity and investment timing.
Flipping: Some investors sell shares soon after listing to seek short-term gains. This can contribute to price volatility and may reflect market sentiment.
Why does a Company Offer an IPO?
Companies choose to become public for many reasons. Some of them are:
Raising Growth Capital: The primary purpose is to raise large amounts of money to fund new ventures, expand the current operations, or diversify into new markets.
Debt Repayment: IPO funds can be used to clear loans, reducing interest costs.
Increasing Brand Visibility: Being listed on the stock exchange increases trust among customers, suppliers, and investors.
Exit Opportunity for Early Investors: Founders and early investors can sell part of their stake through an Offer for Sale, subject to the offer terms.
Funding Research and Acquisitions: Companies can invest in innovation or buy other businesses.
Improving Liquidity: Once listed, the shares can be easily bought or sold, making them liquid assets for shareholders.
Advantages and Disadvantages of Investing in IPO
An IPO may offer investors access to a company’s shares at the time it lists, but it also involves uncertainty. Investors may receive fewer shares than they applied for – or none – and the share price can move up or down after listing. Review the offer documents, business risks, financial information, and issue structure before deciding whether to apply. IPO participation does not guarantee a listing gain or profit.
| Investor Considerations | Possible Advantages | Possible Disadvantages |
|---|---|---|
| Access | Opportunity to apply for shares of a company at the time of its public listing | Application does not guarantee allotment |
| Price movement | Shares may trade above the issue price after listing | Shares may also list below the issue price or fall in value later |
| Information | Offer documents provide business, financial, and risk disclosures | Disclosures may not eliminate uncertainty or market risk |
| Liquidity | Listed shares can generally be traded on the stock exchange | Share price may be volatile, especially after listing |
| Decision-making | Investors can assess the company before applying | Research takes time and requires understanding of the offer documents |
Read Complete Guide: Advantages and Disadvantages of IPO for Investors
Important Things to Know Before Investing in an IPO
IPO investing can prove to be a thrilling opportunity, but one should be well-prepared beforehand before parting with their money.
Research the Company: Know its past, financials, and future growth prospects.
Read the Prospectus: Know the business model, risks involved, and past performance.
Review the Use of Proceeds: Check whether the funds are proposed for business expansion, debt repayment, general corporate purposes, or other stated objectives.
Understand the Issue Structure: Check whether the IPO includes a fresh issue, an Offer for Sale (OFS), or both.
Know the Price of the IPO: Know whether it’s a fixed price or book-building issue.
Check the Price Band: Observe the range and decide your limit of investment.
Understand the Lock-in Period: You may not be able to sell shares as early as allotment.
Ensure Account Readiness: Check your Demat, trading, and bank accounts are active and inter-linked.
Define Your Investment Strategy: Clearly state your financial goals and know your risk appetite.
Be Aware of Risks: IPOs are subject to market risks; think about possible gains and losses.
Be Patient and Informed: Do not hurry; choose research and planning.
Read Full Guide: Things You Should Know Before Investing in IPO
How to Invest in IPO with Findoc
To invest in an IPO on Findoc, follow these steps:
- Ensure that you have an active Demat and trading account with Findoc. If not, you can easily open Demat and trading account online to get started.
- Log in to the online platform or mobile application of Findoc.
- Proceed to the IPO section and select the IPO in which you want to invest.
- Verify such crucial details as price band, issue dates, and lot size.
- Enter the number of lots you wish to apply for.
- Choose your bidding price within the allowed range.
- Submit the application using the payment option available on the platform and follow the instructions to approve the required mandate, if applicable.
- After submission, track allotment status on the platform after the closure of the IPO.
The application amount may be blocked while the IPO application is processed. Check the current offer details and platform instructions before submitting.
Explore IPOs available on Findoc and review the offer details before applying. IPOs involve market risk, and share prices can rise or fall after listing.
Read the Full Guide: How to Apply for IPO in India?
Fresh Issue vs Offer for Sale (OFS)
A fresh issue and an Offer for Sale are two different ways shares may be offered in an IPO. In a fresh issue, the company issues new shares and receives the proceeds, subject to the offer terms. In an OFS, existing shareholders sell some of their shares, and the sale proceeds go to those selling shareholders. An IPO may include a fresh issue, an OFS, or both. Check the offer document to understand the structure of a specific issue.
Primary Market vs Secondary Market
The primary market is where investors apply for shares offered in an IPO. After the shares are listed, investors can generally buy and sell them on the secondary market through a stock exchange. The price after listing may differ from the IPO issue price and can change with market conditions.
ASBA and UPI: What Happens to Your Money?
ASBA stands for Application Supported by Blocked Amount. When an investor applies through ASBA, the application amount is blocked in the bank account rather than immediately transferred to the company. The amount is debited to the extent of shares allotted; the remaining amount is released according to the applicable process. UPI may be used as a payment mechanism for eligible IPO applications. Check the current instructions from the bank, broker, and offer documents before applying.
IPO Example
Suppose a company offers shares through a book-building IPO with a price band of ₹100–₹110 per share. An investor places an application for one lot at the applicable bid price or chooses the cut-off option, if available for that investor category. The final issue price and allotment depend on the offer terms and demand. This is a hypothetical example only; actual IPO terms vary.
IPO Risks and Listing Day Expectations
IPO shares can trade above or below the issue price after listing. Demand, company disclosures, valuation, market conditions, and the number of shares available for trading can all affect the price. An application does not guarantee allotment, and allotment does not guarantee a gain. Investors should review the offer documents and consider the possibility of losing money.
More Stock Market Guides
| Check IPO Calendar | |
|---|---|
| Current IPOs | Upcoming IPOs |
| Recently Listed IPOs | Closed IPOs |
Frequently Asked Questions
IPO is the abbreviation for Initial Public Offering. It is the method through which a private firm issues its shares to the public for the first time to obtain capital and be listed in the public markets.
In an IPO, a company offers shares to the public at a fixed or book-built price. Subscribers apply over a subscription period, and on allotment, the shares are floated on the stock exchange for public trading.
IPOs can present opportunities for growth in case the company has favourable fundamentals and market potential. They do present risks because of market fluctuation. Investors need to research carefully before opting to participate.
No, only those companies that fulfil regulatory specifications such as minimum profitability, net worth, and disclosure norms prescribed by market regulators can issue an IPO. It keeps investors safe from false claims and ensures transparency.
An IPO is usually listed on the stock market a few days after the allotment period is over. The date is notified in advance by the company and the exchange.
Any admissible Indian resident, NRI, or eligible foreign investor with an active Demat and trading account, valid PAN, and fulfilled KYC can invest in an IPO during the application time.
In a fresh issue, the company issues new shares and receives the proceeds, subject to the offer terms. In an OFS, existing shareholders sell shares and receive the proceeds. An IPO can include either structure or both. Check the offer documents for the details of a specific issue.
With ASBA, the application amount is blocked while the application is processed. If no shares are allotted, the blocked amount is released according to the applicable process. Check your bank’s and application platform’s instructions for the status and timing.
Once shares are credited and trading begins, allotted shares can generally be sold through the stock exchange, subject to applicable rules, trading access, and any restrictions relevant to the shares.
No. An IPO may list above or below its issue price. The listing price and subsequent share price depend on market demand and other factors; a profit is not guaranteed.
An IPO is an offer through which investors apply for shares before the company’s stock begins exchange trading. After listing, investors generally trade shares with other market participants in the secondary market.
The price-setting method depends on the offer structure. In a fixed-price offer, the price is specified in advance. In book building, investors bid within a disclosed price band and the final issue price is set under the offer process. Review the offer document for the specific IPO.
IPO applications and share allotments involve securities being held electronically. Check the application platform and current rules for the account and identification requirements that apply to your investor category.
An IPO is oversubscribed when applications exceed the shares available in a relevant investor category. Oversubscription does not guarantee allotment; allocation follows the applicable rules and offer terms.