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Explore what an IPO is and understand how companies use it to raise capital and list on stock exchanges.
An Initial Public Offering (IPO) is the mechanism that allows companies to get listed on stock exchanges and raise fresh capital from the public. These funds enable companies to invest in their growth, expansion, or debt repayment.
For investors, IPOs provide an opportunity to participate in a company’s growth journey from an early stage. They also, however, involve risks and complications. To ensure investor interest, the Securities and Exchange Board of India (SEBI) regulates IPOs and other investments.
As per the Initial Public Offering definition, it is a process through which a private company offers its shares to the public for the first time. It involves listing the company shares on a stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).
Initially, the company's shares may be privately held by founders, early investors, and employees. The IPO converts the company into a publicly traded entity. IPOs allow a company to raise capital by selling new shares. Post-IPO, shares can be traded in the secondary market.
Companies launch an Initial Public Offering (IPO) to achieve strategic, financial, and reputational objectives. These offerings mark a significant step in a company’s journey from private ownership to public participation.
Key reasons include:
Capital Generation: An IPO helps companies raise substantial funds from the public to finance expansion, repay debt, or invest in new projects.
Market Visibility: Public listing enhances the company’s brand presence and credibility among customers, investors, and business partners.
Shareholder Liquidity: It allows early investors, founders, and employees to monetise part of their holdings, providing liquidity and diversification.
Regulatory Alignment: Going public aligns a company with structured regulatory standards, improving transparency and governance practices.
Valuation Benchmarking: Being listed on a recognised exchange establishes a market-driven valuation that reflects investor sentiment and company performance.
Overall, launching an IPO helps businesses access capital and enhance financial flexibility, build a reputable market presence, and operate within a transparent regulatory framework that supports sustainable long-term growth.
The process of an IPO involves several key steps. These include:
Companies appoint investment banks or merchant bankers to manage the IPO. They assist with regulatory filings, pricing strategy, and marketing the issue to investors. Underwriters agree to purchase unsold shares, minimising risk for the company.
The company prepares a detailed document called the DRHP, containing financial statements, business details, risks, and management information. The company then submits the DRHP to SEBI for approval.
During this period, the SEBI verifies the application and IPO details. The company's financials and details are analysed for errors, discrepancies, and issues. If all is well, SEBI approves the application and asks the company to set an IPO date.
Simultaneously with the DRHP filing or shortly thereafter, the company applies to the chosen stock exchange (NSE, BSE, or both) for in-principle approval for listing. Final listing approval is granted after the successful completion of the IPO and allotment of shares.
Post-approval, merchant bankers and company executives organise roadshows. The aim is to present the company’s business to institutional investors across cities. It helps gauge demand and generate interest.
There are two methods through which a company determine the IPO price: fixed price and book-building.
In a book-building IPO, you place bids indicating the quantity and price you are willing to pay. The price band is decided, and the final price is set based on demand. In contrast, a fixed-price IPO sets a predetermined price for shares.
After the bidding closes, shares are allotted to investors. The company’s shares are then listed on stock exchanges, such as the NSE or BSE, allowing trading to commence.
Participating in an Initial Public Offering (IPO) allows investors to engage in a company’s market debut. While IPOs can present attractive prospects, they also carry certain limitations that should be considered carefully.
| Advantages | Disadvantages |
|---|---|
Opportunity to Invest Early: Investors can purchase shares at the issue price before public trading begins. |
Uncertain Market Performance: Post-listing prices may fall below the issue price, leading to short-term losses. |
Potential for High Returns: If the company performs well, early investors may benefit from price appreciation. |
Risk of Overvaluation: Some IPOs are priced aggressively, which may not reflect the company’s actual fundamentals. |
Transparency and Regulation: Listed companies are bound by SEBI’s disclosure norms, ensuring regular financial reporting. |
Limited Track Record: Many newly listed companies have minimal financial history, making analysis difficult. |
Liquidity Creation: Shares can be freely traded once listed, allowing investors to exit when desired. |
Allotment Uncertainty: Oversubscription can result in partial or no allotment, limiting participation. |
Portfolio Diversification: Investing in IPOs across sectors can spread exposure and reduce dependence on a single asset class. |
Volatility Risk: New listings often experience sharp price swings due to market speculation and sentiment. |
Understanding both sides of IPO participation helps investors take balanced, research-based decisions rather than relying on short-term trends or assumptions.
IPOs can be broadly classified based on the nature of the shares being offered and the purpose of the issue. Understanding the type helps investors evaluate the objective and impact of the IPO on both the company and its shareholders.
In a fresh issue, the company creates and offers new shares to the public for the first time.
The primary aim is to raise fresh capital for business expansion, debt repayment, or other corporate needs.
Since new shares are added to the existing pool, the ownership of current shareholders is slightly diluted.
In an OFS, existing shareholders such as promoters or early investors, sell their shares to the public.
The funds raised from the sale go directly to these shareholders, not to the company itself.
This route allows early investors to liquidate part of their holdings and provides a smooth exit opportunity.
Recognising the difference between a fresh issue and an OFS helps investors understand whether an IPO is designed to raise capital for business growth or to offer an exit path for existing shareholders.
The price of an IPO in the share market depends on various factors. Here are some of them.
Company Valuation: Based on financial performance, growth potential, and industry benchmarks
Market Conditions: Prevailing market sentiment and economic factors influence pricing
Investor Demand: Book-building method uses investor bids to guide the final price
Regulatory Guidelines: SEBI sets rules on minimum pricing and disclosures
Comparable Companies: Share prices of similar companies in the industry are assessed
Company Goals: May also depend on objectives, such as valuation optimisation or fundraising
Formula to understand issue price setting:
Issue Price = (Company Valuation) / (Total Number of Shares Issued)
IPOs allow investors to participate in a company's transition to the public market. Some benefits of IPOs include:
Opportunity to invest early in a company’s growth journey
Potential for significant capital appreciation
Access to new and diverse investment opportunities
Investors can trade the shares in the open market, enhancing liquidity and flexibility
IPO prices may be set at levels determined by market demand and valuation
Understanding these factors helps investors make informed decisions aligned with their risk profile.
Familiarising investors with the essential IPO terms enables them to make informed decisions. Here are some key terms every investor should know before investing in an IPO:
Prospectus: Document detailing the IPO, company information, and risk factors
Issue Price: The price at which shares are offered in the IPO
Grey Market Premium: Informal premium paid for IPO shares before listing
Listing: When a company's shares are admitted to be traded in the stock market
Lock-up Period: Duration during which promoters and initial investors cannot sell shares
SEBI regulates IPOs to promote fair practices and build investor confidence. Some of the key regulations include the following:
Requires detailed disclosures to ensure transparency
NSE and BSE oversee the trading post-listing
Companies must comply with the Companies Act, 2013
Initial Public Offerings are key events that allow companies to access public capital. Alongside, they offer you a route to participate in corporate growth. Understanding how IPOs work enables investors to make informed and cautious participation decisions.
While IPOs can provide growth opportunities, awareness of associated risks and regulations helps you navigate them.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
An IPO is the first sale of a private company’s shares to the public through a stock exchange.
Companies appoint bankers, file documents with SEBI, market shares, set prices, allot shares, and get listed on exchanges.
Some IPO types include Fixed Price Issue, Book Building, and Hybrid or Combined Issue.
Companies can issue IPOs for reasons such as to raise capital, improve visibility, and provide liquidity to shareholders. By issuing IPOs, these companies go from private to public firms.
The price of IPOs is decided through valuation, market conditions, demand, or through book-building.
Risks associated with IPOs include price volatility, lock-in restrictions, and uncertain company performance.
Retail investors can participate in IPOs via brokers or online platforms.
The lock-in period refers to a specific time during which major shareholders cannot sell shares after the IPO.
To apply for an IPO, you must first open your demat account. You will need to log in to a trading platform or connect via a broker or DP and choose an IPO to apply.
Oversubscription of shares means the demand is higher, and more investors want to buy shares. In such cases, the company and its merchant bankers follow a predefined allotment methodology outlined in the offer document, typically involving:
Pro-rata allotment for Qualified Institutional Buyers (QIBs) and Non-Institutional Investors (NIIs)
Lottery system for retail individual investors (RIIs) to ensure equitable distribution for minimum application sizes
IPO stands for Initial Public Offering, which refers to the process where a private company offers its shares to the public for the first time to raise capital. This enables the company to list on a stock exchange, like NSE or BSE, allowing investors to buy and trade its shares.
An IPO functions by a company issuing new shares to the public to raise funds, typically for expansion or debt repayment. The process involves regulatory approvals from SEBI, share pricing, and allocation through applications, followed by listing on a stock exchange for trading.
Selling IPO shares involves investors applying for shares during the offer period through a demat account. After allotment, shares are credited to the demat account and can be sold on the stock exchange once listed, following SEBI regulations and market conditions.
Companies launching an IPO must meet SEBI’s criteria, including ₹3 Cr tangible assets, ₹1 Cr net worth, and profitability in 3 of 5 years. They must file a Draft Red Herring Prospectus and obtain necessary regulatory approvals.
An IPO is listed on a stock exchange, such as NSE or BSE, typically within 3-6 working days after the share allotment process is completed. The exact listing date depends on SEBI’s timeline and the registrar’s efficiency in finalising allotments.
Investors need a demat account to apply for an IPO. Retail investors, high-net-worth individuals, and institutional investors can participate, with specific share quotas allocated per SEBI guidelines. A valid PAN and sufficient funds in a linked bank account are also required.
The full form of IPO is Initial Public Offering, which refers to the first sale of a company’s shares to the general public through a stock exchange.
Not all companies qualify for an IPO. Only those meeting SEBI’s eligibility criteria—such as minimum capital requirements, consistent profitability, and transparent financial reporting—can issue shares publicly.
An IPO (Initial Public Offering) is when a company issues shares to the public for the first time, while an FPO (Follow-on Public Offer) occurs when a company already listed on the stock exchange issues additional shares to raise more capital.
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