IPOs Explained: From Offer Document to Listing

An IPO, or initial public offering, is the first sale of a company's shares to the public. The shares sold can be new, which is called a fresh issue. They can also be existing shares, sold by the people who already own them, which is called an offer for sale, or OFS. The important question in any IPO is who receives the money.

Think of a housing society. A new flat sold by the society pays the society. A flat sold by an existing owner pays that owner. The building is the same either way. A share differs from a flat in one way: it is a slice of a business, and its value can change after you buy it.

Sabzi Wala Foods Ltd is an imaginary company used only to explain. The numbers, prices, lots and rates are teaching numbers, not real. Its offer is 2,00,000 shares at ₹150, which is ₹3,00,00,000, or ₹3 crore. We will compare three versions of this one offer, and in each of them the price and the number of shares offered stay the same. Only the source of the shares changes.

In version A all the shares are new. The company receives 2,00,000 × ₹150, which is ₹3 crore, and the founders receive nothing. After the IPO there are 10,00,000 shares, and the founders hold 8,00,000 of them, which is 80%. Their share of the company falls because the total number of shares has risen.

In version B, 1,50,000 shares are new and 50,000 are sold by the founders. The company receives 1,50,000 × ₹150, which is ₹2,25,00,000, and the founders receive 50,000 × ₹150, which is ₹75,00,000. Together that is the same ₹3 crore. Founders then hold 7,50,000 of 9,50,000 shares, which is 78.9%.

In version C, the founders sell all 2,00,000 shares. The company receives ₹0, and the founders receive ₹3 crore. After the IPO there are 8,00,000 shares, and the founders hold 6,00,000 of them, which is 75%. Their share falls because they hold fewer shares. A fresh issue pays the company, and an offer for sale pays the sellers. The offer document states the split.

In the IPO you apply for shares, and you may or may not be allotted any. After the shares are listed, you place an order on the exchange at a price you choose. These are two different ways of buying the same shares, and it helps to know which door you are using at any time.

Think of booking a train seat at the counter and buying a seat from a passenger on the platform. The counter has a fixed fare, and the railway decides how many seats you get. The platform has no fare list, and the price depends on what the other person agrees to. The picture is simple, but the idea is exact.

In the IPO you buy from the company or from the selling owners, in whole lots, at one final price set by the issue. The quantity is decided by allotment, and it can even be zero. You can apply only while the issue is open, and you receive your answer after closing. The offer document is your main source of information.

After listing you buy from another investor through the exchange. You can choose any number of shares, and you choose your own order price, which the market decides whether to meet. You can place an order on any trading day. You have the offer document and also the later announcements of the company.

Asha applies for 1 lot of 100 shares at the issue and gets her answer after closing. After listing, she could place an order for 10 shares on any trading day. The first lesson named these the primary and secondary markets. Missing the issue does not say whether buying later is better or worse, because the price may be above or below the issue price.

An IPO runs in a fixed order, and each step leaves a document or a date. The offer document is the long written filing that describes the business, the accounts, the risks and the use of the money. It is public and free to read. This lesson covers a main-board IPO, which has eight steps.

Think of planning a wedding. You decide, book the hall, send the card with the date and the rate, and wait for replies. Unlike a wedding card, an offer document is reviewed by a regulator. The picture shows the order of steps well, but it does not show the regulator's part, which comes next.

Sabzi Wala's founders first decide to list. The board and the owners agree, and a merchant banker, which is the bank that manages the issue, and a registrar, which is the firm that runs allotment, are appointed. Nothing is public yet. Then a draft offer document is filed with SEBI and made public. It has no price, because the price band comes only later in the process.

SEBI reviews whether the disclosure is complete, and the company answers, which leads to changes in the draft. The final version adds the price band of ₹140 to ₹150 and the dates, and it is the one that you read before bidding. One working day before opening comes the anchor day, when large institutions bid and are allotted shares.

The issue then stays open for at least three working days, called Day 1, Day 2 and Day 3, and you bid in this time. Call the closing day T. After closing, the registrar decides who gets how many shares, and you learn whether you got shares and about any refund. Listing happens within three working days of T, when shares begin to trade.

A common mistake is to read SEBI's review as a verdict on the company. SEBI reviews whether the disclosure is complete. That does not say the price is fair or that the business will grow. The price band is announced before the issue opens, in the final offer document, so you can see it before you decide.

In book building, the company names a price band and then collects bids at different prices. A bid is your offer to buy a number of shares at a price. The company then sets one final price, and every applicant who is allotted shares pays that same price. The collected bids are called the book.

Picture a mandi auction for 200 crates. Buyers call different rates, and the auctioneer finds the rate at which all 200 crates sell. Every buyer pays that rate. In an IPO the company and its bankers set the final price at or below the top price in the book, so a keen bidder does not pay more than the others.

Sabzi Wala's price band is ₹140 to ₹150, where ₹140 is the floor and ₹150 is the cap. The cap can be at most 120% of the floor, and 140 × 1.2 is ₹168. Here ₹150 is 107.1% of ₹140, so the band is well within the limit. A bid inside the band is valid.

Take Book X first. Here 2,60,000 shares are wanted at ₹150 against 2,00,000 shares offered. That is 1.3 times, so the final price is ₹150, and the company receives ₹3,00,00,000. In Book Y, shown in the table, the demand is weaker. The whole offer can sell at ₹145, which is the top price at which all of it can sell, so the final price is ₹145.

In Book Y, the company receives 2,00,000 × ₹145, which is ₹2,90,00,000, or ₹10,00,000 less than in Book X. A bid at ₹148 for 100 shares holds ₹14,800 and pays ₹14,500, so ₹300 is released. A bid at ₹142 is below the final price and gets no shares.

The cut-off option is a box that a retail bidder ticks to accept whatever final price is set. It holds ₹15,000 for 1 lot, pays ₹14,500 at the ₹145 price, and releases ₹500, which is the same as for any other bid. Real books are split by bidder group and counted in lots, and this one is simplified so that the idea stays clear. This lesson covers main-board book-built issues, as fixed-price issues state one price upfront.

You bid for shares in whole lots. A lot is the smallest number of shares that you may bid for. The amount held for your application is the lot size times the cap price times the number of lots. This simple formula lets you work out the rupees before your app does.

Think of a wholesaler who sells onions only in bags of 100. You cannot buy 37 onions. Unlike a bag of onions, a lot is fixed for the whole issue and does not change with the day's rate. If you want a bigger quantity, you take more lots, not a part of a lot.

SEBI's guidance puts one lot's value at about ₹10,000 to ₹15,000. Sabzi Wala's lot is 100 shares. At the cap, one lot is 100 × ₹150, which is ₹15,000. At the floor, it is 100 × ₹140, which is ₹14,000. So the band and the lot read together give one lot between ₹14,000 and ₹15,000.

Asha bids for 1 lot at the cut-off option. ₹15,000 is held, because cut-off bids are held at the cap. Ravi bids for 5 lots, which is 500 shares, and 500 × ₹150 is ₹75,000 held. If the final price is ₹145, Asha pays 100 × ₹145, which is ₹14,500, and ₹500 is released.

Retail means an application of up to ₹2,00,000. Now 2,00,000 ÷ 15,000 is 13.33, so 13 lots is retail, and 13 × ₹15,000 is ₹1,95,000. Fourteen lots is ₹2,10,000, which is above the line. The cut-off option is not available there, and above ₹2,00,000 you are no longer in the retail group.

The held amount is a maximum. What you finally pay is the shares allotted times the final price. The money held cannot be spent while it is held, so keep enough balance for the whole amount. Reading the band and the lot together is a habit worth forming before every application.

ASBA stands for application supported by blocked amount. It keeps your money in your own bank account but holds it back, so that you cannot spend it. The money is taken only for the shares that you are allotted. If you get no shares, none of your money is taken, and the full amount is released.

Think of a cheque that you have written but the shop has not yet banked. The money is still yours but promised. Unlike a cheque, the amount is held by your own bank until the allotment is done. The money has not gone to the company. It has not left your account at all.

You apply through a broker's app or a bank. A request, called the UPI mandate, appears in your UPI app, and you approve it. A valid application needs an approved request. Your bank then holds ₹15,000 for Asha's 1 lot. Approving the UPI request makes the application valid, and without it the bid is not counted.

Individuals may use UPI for applications up to ₹5,00,000. This follows a SEBI circular of 5 April 2022. A bid above ₹2,00,000 and up to ₹5,00,000 is non-institutional, not retail. After the issue closes, the registrar decides who gets shares. The registrar is a firm appointed by the company to run the allotment and send refunds.

Then the money is taken or released. If Asha is allotted at ₹150, ₹15,000 is taken, nothing is released, and 100 shares are credited. At ₹145, ₹14,500 is taken and ₹500 is released. If she is not allotted, ₹15,000 is released and no shares come. For Ravi's 5 lots, ₹75,000 is held. If drawn for one lot, ₹15,000 is taken and ₹60,000 released.

The hold protects your money, but it does not change your chance of receiving shares. It also does not say whether you will get any. Holding is a matter for your bank, and the allotment is a separate matter for the registrar. How the draw works is explained in the section after the next one.

Before the issue opens, the shares are divided into groups, and you compete only inside your own group. QIBs are qualified institutional buyers, which means large institutions. Non-institutional investors are individuals above ₹2,00,000 and others. Retail means individuals up to ₹2,00,000. The groups are sized before the issue opens, and each has its own supply and its own demand.

Think of a wedding hall with reserved blocks of seats for family, friends and vendors. Your seat is only in your block. Unlike a wedding, here the route a company uses sets the block sizes. Route 1 is allowed by SEBI for a company that meets its profitability test. Route 2 is for companies that do not meet it.

Take Route 1. Of Sabzi Wala's 2,00,000 shares, QIB gets up to 50%, which is 1,00,000. Non-institutional gets at least 15%, which is 30,000. Retail gets at least 35%, which is 70,000. These add up to 2,00,000 shares, and with 100 shares in a lot, the retail group has 700 lots.

Under Route 2, QIB gets at least 75%, which is 1,50,000. Non-institutional gets up to 15%, which is 30,000. Retail gets up to 10%, which is 20,000. These also add up to 2,00,000. Retail lots fall from 700 to 200, so the same demand gives a much smaller retail chance. The real split is set in the offer document.

Anchor investors are large institutions. They bid one working day before the issue opens, at a price set before opening. They sit inside the QIB part, up to 60% of it, which is 0.6 × 1,00,000, or 60,000 shares. The other 40,000 QIB shares are open to all QIBs. A part of the anchor book is reserved for domestic mutual funds, insurers and pension funds.

A common mistake is to think that everyone fights for the same shares. A group subscribed 90 times says nothing about the retail group. Your chance depends on your own group's size and demand, and the next section shows why. The ₹2,00,000 line is explained in the participants lesson, and the offer document gives the exact split for each issue.

Subscribed N times means the shares bid for, divided by the shares offered. When it is above 1, the issue is oversubscribed, which means more shares were bid for than were offered. Retail applications are then given one lot each first, if shares allow. If there are more applications than lots, a draw of lots decides who gets one.

Think of a school with 700 seats and 7,000 forms. A draw gives each form the same chance, however thick the file. Unlike a school, applicants here can bid for different numbers of lots, which changes the count of forms. That is why the subscription number alone does not show your chance of getting a lot.

Sabzi Wala's retail part is 70,000 shares, which is 700 lots. Suppose 7,000 applications come, each for one lot. Shares bid are 7,000 × 100, which is 7,00,000, so the issue is subscribed 10 times. The chance of one lot is 700 ÷ 7,000, which is 1 in 10, or 10%.

Asha, who bids for 1 lot with ₹15,000 held, and Ravi, who bids for 5 lots with ₹75,000 held, are each one entry in the draw. Each gets at most one lot, which is 100 shares worth ₹15,000. If Ravi is drawn, ₹60,000 is released to him. More lots hold more money without improving the chance.

If applications are fewer than 700, all of them get one lot, and the rest are shared in proportion. At 700 applications the chance is 100%. At 2,100 applications it is 1 in 3, at 7,000 it is 1 in 10, and at 35,000, which is 50 times, it is 1 in 50, or 2%.

Bids under the same PAN, which is your tax number, may be treated as multiple bids and rejected. Allotment also does not say whether the price will rise or fall. In an oversubscribed retail group, a draw gives each application the same chance of one lot. The three cases below show the same 10 times with different application sizes.

Listing is the day shares first begin to trade on an exchange. The exchange collects orders in a special session and finds one price at which the most shares can trade. That is the listing price. It is found from the morning's orders and not from any earlier trade, since a new share has none.

Picture an auction where all bids are collected first and then one price clears, so that everybody who is matched gets the same rate. Unlike that auction, orders can be changed while the session is collecting them. The exchange does the matching by rule, so no one person decides the price.

A new share has no earlier price, so the normal opening cannot work. On the listing morning the exchange runs a short special session first. Orders are collected, then matched at one price, and then normal trading starts. The exchange publishes the exact times, so check its notice for the day.

At each price, the shares that can trade are the smaller of the buy and sell numbers. At ₹160, 70,000 buy and 12,000 sell, so 12,000 can trade. At ₹170, 20,000 buy and 45,000 sell, so 20,000 can trade. At ₹165, 55,000 buy and 30,000 sell, so 30,000 can trade. That is the largest number, so the listing price is ₹165.

The issue price was ₹150, so the gain is ₹165 − ₹150, which is ₹15 per share. That is 15 ÷ 150, or 10%, and ₹1,500 on a lot of 100. A buyer at ₹165 pays 10% more than the issue price. If the share lists at ₹150, the gain is ₹0. At ₹135, the loss is ₹15, or 10%, which is ₹1,500 per lot.

A later fall from ₹150 to ₹120 is a loss of ₹30, which is 20%. Returning to ₹150 needs a rise of ₹30 ÷ ₹120, which is 25%. These are teaching numbers, not a forecast, and they ignore charges and taxes. The listing price does not say what the company is worth, or what tomorrow's price will be.

A lock-in is a period when named holders may not sell their shares. On listing day only part of the company's shares can be sold. More shares become free to sell on dates stated in the offer document. These dates are known in advance, so nobody is surprised by them.

Think of a society's reserved seats that open to the public only after set dates. Opening a seat does not mean the seat is used. In the same way, a share becoming free to sell does not mean its holder will sell it, and no holder's plan is known to us.

Sabzi Wala has 10,00,000 shares. The 2,00,000 public shares include 60,000 anchor shares, so 2,00,000 − 60,000, which is 1,40,000, are free on listing day. That is 14% of the company. Half the anchor shares, which is 30,000, are free after 30 days, making 1,70,000 or 17%. The other 30,000 are free after 90 days, making 2,00,000 or 20%.

The founders' minimum contribution is 20% × 10,00,000, which is 2,00,000 shares, locked for 18 months in this example. The other founder shares, 8,00,000 − 2,00,000, which is 6,00,000, are locked about 6 months. After about 6 months 8,00,000 shares are free, which is 80%, and after 18 months all 10,00,000 shares are free.

Compare these numbers with the 20,000 shares traded in a day. The 30,000 anchor shares are 1.5 days of trading, and the 6,00,000 founder shares are 30 days of trading. A larger number of shares free to sell is a fact about supply. It does not say what any holder will do or what the price will do.

The founders' lock is 3 years, not 18 months, if most fresh money goes to capital spending. The offer document states the exact periods, so read that section for each issue. Free to sell is not the same as sold. Lock-in dates tell you when more shares become free, and nothing else.

GMP, the grey market premium, is an unofficial number quoted for informal dealing in shares before listing. It is quoted outside the exchanges. SEBI and the exchanges do not publish it, and this lesson does not use it to judge any issue. It is mentioned only because beginners meet the term often.

Think of a neighbour who says what your flat will fetch, before the sale deed is registered. It is talk, not a registered price. Unlike a neighbour, GMP is quoted by informal dealers, who are not part of any exchange. A quote of this kind does not carry the weight of a price that the exchange has found.

Take a quote of GMP ₹15 on the ₹150 issue price. It means shares informally dealt at ₹150 + ₹15, which is ₹165. That is 15 ÷ 150, or 10%, above the issue price. These are teaching numbers, not a real quote, and nobody should treat them as a guide for any issue.

If the shares list at ₹165, the gap from the quote is ₹0. If they list at ₹135, the quote was ₹30 above the listing price. That is 30 ÷ 150, or 20% of the issue price. Both outcomes sit with the same quote, so the quote does not decide the listing price.

The quote is also not about the business. It says nothing about the company or about any outcome. A quote and a price are different things. The listing price is produced by the exchange from that morning's orders, and it is official. GMP is produced by informal dealers outside the exchanges, and it is not.

An offer document answers questions about the business, the accounts, the risks and what the money is for. It says what the company discloses, in a form that anyone can read. It does not say what the price will do. No IPO promises a listing gain, shares or a later price, and this section explains why.

Think of reading the terms sheet of a flat: the area, the builder's past work, the payment schedule and the risks. Unlike a brochure, an offer document is a regulated filing. SEBI reviews the disclosure and does not promise price or performance. A large issue or a known name does not say the price is fair.

Sabzi Wala's document states what the money will be used for. Of the ₹3,00,00,000, ₹1,80,00,000, which is 60%, is for a cold store and kitchen. ₹90,00,000, which is 30%, repays a loan, and ₹30,00,000, which is 10%, is for general use. These add up to ₹3,00,00,000, which is the whole of the money that the company receives in version A, so every rupee has a stated purpose.

The loan of ₹1,50,00,000 falls to ₹60,00,000 after repaying ₹90,00,000, since 1,50,00,000 − 90,00,000 is 60,00,000. In version C, where owners sell everything, none of the money goes to the company, so none of these uses could be paid for from the issue. Reading accounts in depth is in the annual-report lesson. The six questions below give a plain way to read any offer document.

Several things are not promised. A listing price above the issue price is not promised, because it may be above, equal or below, which is +10%, 0 or −10% in the example. Shares are not promised, because an oversubscribed issue is a draw, and the chance was 1 in 10 in the example. A later price is not promised, since a fall from ₹150 to ₹120 is −20% and needs +25% to return.

The timing is not promised to suit you, as the company and its bankers choose the date, the band and the size. Safety is not promised because SEBI reviewed the document. A listing gain is a price move and not owning a business. Markets carry risk, including the risk of loss of capital. This lesson is education, not investment advice, and no specific issue is discussed or endorsed.