IPO basics

In simple terms

An initial public offering (IPO) is the first time a company offers its shares to the general public. Before an IPO, the company is owned privately by its founders, employees and early investors. After it, anyone can own a piece, and the shares are listed on a stock exchange where they trade every day.

Companies go public mainly to raise money for growth and, often, to give early owners a way to sell part of their stake. As you saw in Primary and secondary markets, those are two different things: a fresh issue raises money for the company, while an offer for sale pays the existing owners.

The steps of an IPO

1. Preparing the offer document. The company and its investment bankers prepare a detailed document describing the business, its history, its financial statements, the risks it faces, its management and promoters, and exactly how the money raised will be used. A draft is filed with SEBI and the exchanges for review and is made public.
2. Setting the price band and lot size. In most Indian IPOs, the company announces a price band, for example ₹95 to ₹100 per share, and a lot size, the minimum number of shares you can apply for, such as 150 shares. You apply in multiples of the lot.
3. The subscription period. The issue is open for applications for a few days. Investors bid for shares at a price within the band.
4. Allotment. After the issue closes, the final price is fixed and shares are allotted according to SEBI's rules.
5. Listing. A few days later the shares are listed on the exchange and start trading in the secondary market, at whatever price buyers and sellers agree.

Applying as an individual

• ASBA. In public issues, applications are made through ASBA, "Application Supported by Blocked Amount". Your application money is blocked in your bank account, not transferred. It stays in your account, and is debited only for the shares you are actually allotted. You can apply through your bank's net banking, or through your broker's app, which asks your bank to block the money.
• Retail individual investors. SEBI's rules reserve a part of most public issues for retail individual investors, defined by a maximum application amount, so that small investors are not crowded out by large institutions.
• One application. Make one application per issue in your own name and PAN. Multiple applications from the same PAN can be rejected.

Why you might not get any shares

Popular IPOs are often oversubscribed: investors apply for many times more shares than are on offer. When that happens, not everyone can be allotted shares. For small applications, the rules aim to give as many applicants as possible at least one lot, which means allotment in heavily oversubscribed issues works much like a draw. Many applicants receive nothing at all, through no fault of their own.

The risks of new listings

IPOs attract a lot of excitement, and excitement is exactly when to be most careful.

• Short track record. Many companies going public have only a few years of published accounts. There is less history to judge them by.
• The seller chooses the timing and price. Companies and their existing owners tend to sell when conditions are favourable for them, which is not necessarily when the price is attractive for you.
• Listing-day swings. The listing price can be well above or well below the issue price. A strong listing gain in one IPO tells you nothing about the next.
• Unofficial "grey market" prices. Before listing, you may hear about a "grey market premium". This is unofficial and unregulated trading talk, not a reliable forecast, and acting on it carries real risk.

Why it matters

IPOs are often a beginner's first contact with the market, because they are advertised widely and feel like a ground-floor opportunity. Understanding the process lets you judge an IPO as an investment in a business, not as a lucky draw. Reading the offer document's description of the business, its finances, the risk factors and the use of proceeds is the most useful single step you can take.

Limitations

This lesson covers mainboard IPOs of equity shares for individual investors in India. There are separate rules for small and medium enterprise (SME) IPOs, which have different investment sizes and generally higher risk, and for other categories of investor such as institutions and high-net-worth individuals. Limits and procedures are set by SEBI and change over time; the facts above were last checked on the date shown, and the current offer document always has the final word for a particular issue.

Common mistakes

• Applying only because an IPO is heavily subscribed. Popularity does not make a company good value.
• Assuming listing gains are normal. Many IPOs list below their issue price or fall below it later.
• Not reading the risk factors. The offer document lists the main risks clearly. Most applicants never open it.
• Paying anyone for a "guaranteed allotment". Allotment follows the published rules. Nobody can sell you a better chance.

Try it yourself

Find the offer document of any recent IPO on SEBI's website or an exchange website. You do not need to read all of it. Find and note:

1. The price band and lot size.
2. How much of the issue is a fresh issue and how much is an offer for sale.
3. The first five risk factors listed.
4. What the company says it will do with the fresh-issue money.

Then ask yourself: if this were a private business a relative was asking you to invest in, would these answers satisfy you?