What Is an IPO? A Practical Guide for Indian Investors

Learn how IPOs work, how to apply, what GMP means and how to evaluate an issue before investing.

Every few weeks, a new company announces it is going public, and the market fills with talk of subscription numbers, listing gains and grey market premiums. Behind all of it is one idea: the IPO.

What Is an IPO?

An IPO, or Initial Public Offering, is the first time a privately held company offers its shares to the public. Before the IPO, ownership may sit with founders, family members, private equity firms or venture capital investors. After listing, eligible investors can buy and sell the shares on exchanges such as the NSE and BSE through their demat and trading accounts.

Why Do Companies Go Public?

  • Raising capital: Proceeds from a fresh issue can support expansion, new facilities, debt repayment or technology.
  • Early investor exit: Founders and early investors may sell some of their shares through an Offer for Sale (OFS).
  • Credibility and visibility: A listed company has ongoing disclosure and compliance obligations.
  • Employee ownership: Listing can provide a market for eligible employee stock options, subject to their terms.

Types of IPO Issues

Fixed-price issue: The company sets one issue price in advance.

Book-built issue: The company announces a price band, and investors bid within it. The final issue price is determined after the bidding period based on demand and the book-building process.

An IPO may include a fresh issue of new shares, an OFS of existing shares, or both. Fresh-issue proceeds go to the company, while OFS proceeds go to the selling shareholders.

How the IPO Process Works

The company appoints intermediaries, including merchant bankers, and prepares a Draft Red Herring Prospectus (DRHP) for filing with SEBI. Following the applicable review and filing process, the offer document is updated and the Red Herring Prospectus (RHP) provides key details such as the price band, issue size, risks, financial information and proposed use of proceeds.

The IPO then opens for subscription, often for three working days, although the actual period is stated in the offer documents. After the issue closes, the basis of allotment is finalised, funds are debited or unblocked as applicable, and shares are credited before listing. The current T+3 listing framework generally targets listing three working days after issue closure, subject to applicable exchange and regulatory processes.

In an oversubscribed retail category, allotment is not assured. The process follows the applicable basis of allotment, and an applicant may receive no shares.

Who Can Apply?

  • Qualified Institutional Buyers (QIBs): Eligible institutional investors such as mutual funds, insurers and other specified institutions.
  • Non-Institutional Investors (NIIs): Applicants in the non-institutional category, generally bidding above the retail limit.
  • Retail Individual Investors (RIIs): Individuals applying within the retail application limit, currently up to ₹2 lakh in a standard IPO.

The allocation percentages and category rules depend on the issue type and applicable regulations. Check the offer document rather than assuming every IPO has identical reservations.

How to Apply for an IPO

For a typical online application, you need a demat account, a bank account and an eligible application route such as UPI or ASBA. Follow the broker or bank's current instructions:

  1. Open your broker's app or bank's ASBA facility and select the IPO.
  2. Enter the bid quantity and price, following the lot size and category limits.
  3. Provide the required details, including your UPI ID if applying through UPI.
  4. Submit the application and approve the UPI mandate within the stated deadline, if using UPI.

Under ASBA, the application amount is blocked in your bank account rather than immediately transferred. If shares are allotted, the amount due is debited; otherwise, the block is released, subject to bank processing.

Lot Size and Price Band

IPO applications are made in multiples of the stated lot size. For example, if the lot size is 50 shares and the upper price band is ₹200, one lot represents an application amount of ₹10,000. The actual lot size, price band and category limits are specified in the offer documents.

In a book-built IPO, bidding at the cut-off price means agreeing to the final issue price, where the option is available to the investor category. It does not improve the probability of allotment in an oversubscribed issue.

What Is Grey Market Premium?

Grey Market Premium (GMP) is an unofficial indication of the premium at which IPO shares are said to trade before listing. It is outside the regulated exchange market, may be unreliable and can change quickly. Treat it only as an informal sentiment indicator, not a forecast or a guarantee of listing gains.

How to Evaluate an IPO

  • Business model: Can you explain how the company earns revenue and what drives its margins?
  • Financial track record: Review revenue, profitability, cash flow and debt over several years.
  • Use of funds: Understand how much is a fresh issue and how proceeds will be used.
  • Valuation: Compare relevant financial measures with listed peers, while accounting for differences in business quality and growth.
  • Promoter and management background: Review experience, shareholding, governance disclosures and material legal proceedings.
  • Risk factors: Read the risk section and understand customer concentration, competition, regulation and other business risks.

Risks to Keep in Mind

An IPO is not a guaranteed profit. Listing gains can disappear if market sentiment changes, and shares may trade below the issue price for extended periods. A heavily subscribed issue or a high GMP does not necessarily indicate a strong long-term business. Decide whether your objective is a listing-day trade or a long-term investment, and do not borrow money to apply.

Final Thoughts

An IPO gives public investors access to a company that was previously privately held. The real work is understanding the business, reading the offer documents and assessing the valuation and risks. Treat every IPO as an investment decision, not a lottery ticket.

Disclaimer: This article is for educational purposes only and does not constitute investment advice or a recommendation to apply for any IPO. IPO investments are subject to market risks, including the risk of loss of capital. Read the offer documents carefully and consult a SEBI-registered investment adviser where appropriate.