IPOs — Initial Public Offerings Explained

An IPO (Initial Public Offering) is when a private company offers its shares to the public for the first time and gets listed on a stock exchange such as the NSE or BSE. It is the company's debut on the public stage.

But 'the company is raising money' is often only half true, and the half that is untrue costs people money. Every IPO is made of two possible components, and you must know the mix before you apply.

A fresh issue creates brand new shares. The money paid for them goes into the company's bank account, and the company must state in its offer document exactly what it will do with it — build capacity, repay debt, fund working capital. This dilutes existing shareholders, because the profit pie is now cut into more slices, but the business gets stronger.

An Offer for Sale (OFS) creates nothing. Existing shareholders — promoters, early investors, private equity funds — sell shares they already own. The money goes to them, not to the company. Share count does not change, and the business is exactly as strong or weak the day after listing as the day before.

Neither is automatically bad. An early investor selling after ten years is normal and healthy. But an issue that is almost entirely an OFS is a liquidity event for insiders, not a growth event for the business — and you should price that difference into your expectations, not discover it later.

An IPO happens in the primary market — where shares are issued and you buy from the company or a selling shareholder rather than from another investor. Once the stock lists and starts changing hands, all of that activity happens in the secondary market, which is the everyday NSE and BSE screen.

The difference is not academic. In the primary market you apply, wait, and may or may not receive an allotment; you have no control over the quantity you get. In the secondary market you decide the exact quantity, see the live price, and get an immediate answer.

The primary market also has a rhythm you cannot influence. An issue is open for a fixed window of a few days, the price band is set by the company and its bankers, and the timing is chosen when market conditions suit the seller. You are a price-taker in every sense.

This leads to the single most calming fact about IPOs: missing one costs you nothing structural. The company does not disappear. Once listed, it trades every day like any other stock, and you can buy it later — often at a calmer price, with a couple of quarterly results already published for you to read.

An IPO is not an announcement; it is a long regulated process, and the documents produced along the way are where the real information sits.

It starts with the DRHP — the Draft Red Herring Prospectus — filed with SEBI. This is the full disclosure document: financials for several years, a description of the business, litigation, related-party transactions, risk factors, and how the company intends to use the money. SEBI reviews it and issues observations, which the company must address.

The DRHP does not contain the price. Once observations are cleared, the company files the RHP (Red Herring Prospectus), which adds the price band and the issue dates. On the working day before the issue opens to the public, anchor investors — large institutions — bid and are allotted shares. Then the issue opens for a few days, closes, and the registrar prepares the basis of allotment.

After allotment, money is unblocked for unsuccessful applicants, shares are credited to successful ones, and the stock lists. SEBI has compressed this final stretch: listing must happen within three working days of the issue closing, so the gap between paying and knowing is short.

You do not need to read all several hundred pages. Read three things: the Risk Factors, the Objects of the Issue (what the money will be used for), and the financial summary. Everything else is context.

There are two ways to price an IPO in India, and almost every large issue uses the first.

In a fixed price issue, the company states one price in the prospectus before the issue opens. You either accept it or you do not. Demand is only visible after the issue closes, so nobody knows during the offer whether it is popular.

In a book-built issue, the company states a price band — a floor and a cap — and investors bid at any price within it. The regulator caps how wide that band can be: the ceiling cannot be more than 120% of the floor. So a floor of ₹440 permits a cap no higher than ₹528.

As bids arrive, the exchanges publish the demand at each price level, live, for anyone to see. When the issue closes, the company and its bankers set the issue price at the highest price at which the entire issue can be sold. That price is called the cut-off price, and everyone who bid at or above it is eligible for allotment — all of them paying the same final price.

That last point surprises people. If you bid ₹462 and the cut-off is set at ₹448, you pay ₹448, not ₹462. Bidding high does not make you pay more; it makes you eligible. This is why retail investors are permitted to tick the cut-off box and skip choosing a number altogether.

You do not buy IPO shares one at a time. You bid in lots, and the lot size is set so that a single retail application comes to a small, standardised rupee amount — which is why lot sizes look arbitrary, like 32 shares or 66 shares. The odd number is a consequence of the fixed rupee target, not a signal about the company.

Your commitment is calculated at the top of the band, always. Even if you expect the final price to be lower, the amount blocked in your bank account is the lot size multiplied by the upper price band, multiplied by the number of lots you apply for. If the issue is priced below the cap, the difference is released back to you after allotment.

Retail investors — those applying for up to ₹2 lakh — can bid at cut-off, which means accepting whatever final price emerges within the band. This removes the risk of bidding too low and being excluded. Institutional and non-institutional bidders do not get this option; they must name a price.

One boundary to respect: the ₹2 lakh line. Apply for ₹2 lakh or less and you are in the retail category with retail allotment rules. Cross it, even by a few thousand rupees, and you are bidding in the non-institutional category, competing under entirely different rules and losing the cut-off option.

This is one of the genuinely investor-friendly parts of the Indian system, and it is worth understanding rather than clicking through.

Every public issue application uses ASBA — Application Supported by Blocked Amount. When you apply, your bank places a lien on the money in your own account. The amount is earmarked and cannot be spent, but it does not leave your account and it continues to earn whatever interest that account pays.

Only if you receive an allotment is the money actually debited, and only for the shares you were allotted. If you get nothing, the block is simply released. If you get a partial allotment or the issue is priced below the cap, only the required portion is debited and the rest is released.

For retail-sized applications the block is authorised through UPI. You apply via your broker or bank, receive a mandate request on your UPI app, and approve it — that approval is what creates the block. The UPI route currently supports applications up to ₹5 lakh, which covers all retail applications and smaller non-institutional ones. Larger applications go through the bank's ASBA facility directly.

The practical failure mode is not fraud; it is inattention. A UPI mandate that is not approved before the cut-off time simply means no valid application — your money was never blocked, and you were never in the running.

An IPO is not a single pool that everyone competes in. It is divided into reserved buckets before the issue opens, and you can only compete inside your own bucket. Your odds have nothing to do with how the other buckets do.

There are three main categories. QIBs are Qualified Institutional Buyers — mutual funds, insurers, banks, foreign institutional investors. NIIs are Non-Institutional Investors, everyone applying above ₹2 lakh, commonly called the HNI category. RIIs are Retail Individual Investors, applying up to ₹2 lakh.

The split depends on the company. An issuer that meets SEBI's profitability and track-record conditions may allot up to half the issue to QIBs, with at least 15% to NIIs and at least 35% to retail. An issuer that does not meet those conditions must place at least 75% with QIBs, leaving at most 15% for NIIs and at most 10% for retail. That second structure is a signal in itself: the regulator is insisting that institutions, who can analyse it properly, take most of the risk.

The NII bucket is itself split. One-third is reserved for applications between ₹2 lakh and ₹10 lakh, and two-thirds for applications above ₹10 lakh, so a smaller HNI is not competing directly against a very large one.

Anchor investors sit inside the QIB portion. Up to 60% of the QIB bucket can be allotted to anchors, who bid one working day before the issue opens, at or above the final price, with a portion of that reserved for domestic mutual funds. Their shares are locked in — half for 30 days from allotment and half for 90 days — which is a detail worth remembering when you reach the section on lock-in expiry.

Oversubscription means more shares were bid for than are on offer. A retail subscription of 8 times means retail applicants collectively bid for eight times the shares reserved for them.

SEBI's rule for the retail category is designed to spread shares widely rather than concentrate them. The registrar must first try to allot the minimum bid lot — one lot — to as many applicants as possible. Only if there are enough shares to give everyone one lot does anything larger get considered.

So when an issue is heavily oversubscribed in retail, the arithmetic collapses to a simple lottery for one lot. Take the number of lots available in the retail bucket, divide by the number of retail applications, and that ratio is roughly everyone's chance. A computerised draw decides who gets it. There is no weighting for who applied first, who applied for more, or who has applied before.

This is why applying for five lots instead of one usually does not multiply your odds in a heavily oversubscribed retail issue: the maximum you can receive is still one lot, and your application is still one entry in the draw. It does, however, block five times the money.

Allotment is per PAN. Multiple applications under the same PAN are rejected, which is not a technicality — it is the rule that makes the one-lot-per-applicant design work at all.

Listing day does not start like a normal trading day. A newly listed stock has no previous close, no order book, and no history, so the exchange runs a longer special pre-open session before continuous trading begins.

It works like the daily pre-open auction but stretched over about an hour from 9:00 to 10:00: orders are collected first without any matching, entry closes at a randomised moment, the exchange then computes the equilibrium price at which the maximum quantity can trade, matched trades execute at that single price, and a buffer period leads into normal continuous trading.

That equilibrium price is the listing price. It is discovered from actual orders by everyone who wants in or out — including every applicant who received an allotment and would like to sell immediately. It has no mechanical relationship to the IPO price, to the grey market, or to any prediction made beforehand.

The exchange also applies a price band on listing day so the stock cannot move without limit in its first hours. The width of that band depends on the size of the issue under the exchange's listing-day framework, and it is stated in the exchange's listing circular for that stock.

One thing to be clear about: a big listing premium is not value being created. It is a transfer. Those who were allotted at the IPO price gain it, and those who buy in the first minutes pay it. Nothing about the underlying business changed between 9:59 and 10:00.

On listing day, only a fraction of a company's shares can actually be sold. The rest are locked in — legally prevented from being sold for a defined period. This is deliberate: it stops insiders from selling into the excitement they helped create.

The periods are set by regulation, and they are staggered. Anchor investors have half their shares released 30 days after allotment and the other half at 90 days. Other pre-IPO shareholders — early investors, employees who hold shares, private equity funds — are typically locked for six months. The promoters' minimum required contribution is held for the longest, and their holding above that minimum is released earlier.

Now think about what happens when each of those dates arrives. The supply of freely sellable shares increases, sometimes sharply, on a date that was known and printed in the offer document all along. If those holders bought years ago at a fraction of the IPO price, they may be sitting on very large gains and be quite willing to sell.

This is the overhang. It explains a pattern that confuses beginners: a stock lists strongly, drifts for weeks, and then falls hard on no visible news. There often is no news. There is simply more supply than there was the day before.

None of this predicts direction. A strong business can absorb a lock-in expiry without much effect. But knowing the calendar means you are never surprised by it, and you are never told 'nobody could have seen that coming' when the dates were published before the issue even opened.

GMP (Grey Market Premium) is the price at which an IPO's shares are informally dealt before listing, quoted as a premium over the issue price. A GMP of ₹50 on a ₹448 issue implies an expectation of listing near ₹498.

Three facts about it are worth more than the number itself. It is unofficial — it happens outside the exchanges. It is unregulated — no regulator supervises it, and there is no recourse if a deal is not honoured. And it is a thin market — a small volume of informal dealing produces the quoted figure that then gets reported everywhere.

That combination has an obvious consequence: it can be influenced. A number that is thin, unofficial, and widely quoted is precisely the kind of number that benefits whoever wants demand to look strong.

It is also frequently wrong in both directions. Strong grey market premiums have preceded weak listings, and modest ones have preceded strong debuts. There is no dependable relationship, and none should be expected from an informal market with no depth.

Treat GMP, at most, as one weak reading of sentiment among many. It says something about what a small informal crowd currently expects. It says nothing at all about whether the business is worth owning.

Replace excitement with a checklist. Before applying, work through the questions below honestly. If the answers are weak, skipping is a perfectly good outcome — there is always another issue, and this one will trade in the secondary market anyway.

Now the part the marketing never covers. The belief that an IPO means a guaranteed listing gain is false, and it is worth understanding exactly why rather than merely being told.

Start with who chooses everything. The company and its bankers choose the timing, the price band, and how much to sell. They choose to come to market when sentiment is good and valuations are generous, because that is their job. No seller in any market prices their goods to guarantee the buyer a profit.

Then note that a listing gain is not created wealth; it is a transfer between participants, and it can just as easily go the other way. A stock can list at a discount, and many have. Add the mechanics you have now learnt: heavy oversubscription means you probably will not get an allotment at all, and lock-in expiries release fresh supply on known dates in the months afterwards.

Finally, be honest about what applying for a listing gain actually is. It is a short-term bet on sentiment over a few days, funded by blocking real money, with a low probability of even getting the shares. That is speculation. It can be done deliberately and in small size with your eyes open — but it should never be confused with investing, and it should certainly never be funded with borrowed money.