An IPO, or Initial Public Offering, is the process where a private company becomes a public company by offering its shares to the general public for the first time. It is a major step for any business and gives investors a chance to own a part of the company.
What Is the Meaning of IPO?
An IPO (Initial Public Offering) happens when a company decides to sell its shares to the public for the first time. This process helps the company raise funds to expand its business, launch new products, reduce debt, or grow operations.
Before launching an IPO, the company operates as a private company, where only the founders, promoters, and early investors own its shares. These shares are not available to the general public.
When the company goes public through an IPO, it gets listed on a stock exchange such as the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) in India. After listing, anyone can buy or sell the company’s shares in the open market through their demat account and stockbroker.
An IPO not only brings capital to the company but also increases its visibility, market credibility, and public trust. It also gives early investors and promoters a chance to earn returns by selling part of their holdings.
In simple terms, an IPO is the first step a company takes to become publicly traded and allow everyday investors to become part-owners by buying its shares.
Why Do Companies Launch IPOs?
Companies launch Initial Public Offerings (IPOs) to achieve several key goals:
- To Raise Capital
Companies issue IPOs to raise money for business expansion, research, and launching new projects. The funds help them grow faster and reach new markets. - To Repay Debts
Many companies use IPO proceeds to pay off loans. This reduces financial pressure and strengthens their balance sheet. - To Build Public Image
Going public increases a company’s visibility, credibility, and brand value. It helps attract more customers, partners, and media attention. - To Offer Exit to Early Investors
IPOs give founders, early investors, and employees an opportunity to sell their shares and earn returns on their investments.
How Does the IPO Process Work?
The IPO process involves several important steps:
- Appointing Merchant Bankers
The company starts by hiring merchant bankers (also known as book-running lead managers) to handle the IPO process. - Filing the DRHP with SEBI
The company files a Draft Red Herring Prospectus (DRHP) with SEBI, which includes key financials, business details, and IPO objectives. - SEBI Review and Approval
SEBI reviews the DRHP to ensure compliance and approves the IPO for public issue. - Announcing Price Band and Dates
After approval, the company declares the IPO price band and the opening and closing dates for investors. - Investor Applications
Investors apply for shares through brokers or online platforms like Zerodha, Groww, Upstox, and others. - Share Allotment
If the IPO is oversubscribed, shares are allotted through a lottery system to ensure fair distribution. - Listing on Stock Exchange
Finally, the company lists its shares on stock exchanges like NSE and BSE, and public trading begins.
Types of IPO
Companies can launch an Initial Public Offering (IPO) in two main ways. Each type follows a different pricing method and process:
- Fixed Price IPO
In a fixed price IPO, the company sets a specific price per share before the issue opens. Investors know the exact price they need to pay while applying. After the IPO closes, the company allots shares based on demand and availability. - Book Building IPO
In a book building IPO, the company offers a price range (called the price band) instead of a fixed price. Investors place bids within this range. After collecting all bids, the company decides the final price, known as the cut-off price.
Key Difference:
- In fixed price IPOs, the price is known in advance.
- In book building IPOs, the price is discovered through investor demand.
Most companies in India prefer the book building method as it helps discover the fair market value of the stock.
Types of IPO Platforms
The companies launch IPOs through different platforms based on their size, capital, and business goals. Each platform serves a specific type of company:
- Mainboard IPO Platform
The Mainboard platform is for large and established companies. These companies meet SEBI’s eligibility criteria and list their shares on major stock exchanges like NSE and BSE. Mainboard IPOs attract all types of investors—retail, institutional, and high-net-worth individuals. - SME IPO Platform
The SME (Small and Medium Enterprises) platform is designed for small and growing businesses. Companies with post-issue capital below ₹25 crore can list here. Platforms like NSE Emerge and BSE SME help such companies raise capital and gain public visibility. Investors get early access to emerging businesses, but must invest in larger lot sizes. - Other IPO Platforms
Apart from regular IPOs, companies use other public offer routes to raise funds or allow investments in specific sectors. Here are three key types:
- REITs (Real Estate Investment Trusts)
REITs allow you to invest in commercial real estate without buying property directly. Companies pool money from investors and invest it in income-generating assets like office buildings, shopping malls, and hotels. Investors earn returns through rent income and capital appreciation. REITs trade on stock exchanges like regular shares. - InvITs (Infrastructure Investment Trusts)
InvITs let you invest in infrastructure projects like highways, power transmission lines, and telecom towers. These trusts collect money from investors and use it to operate and maintain infrastructure assets. You receive returns from the revenue generated by these projects. Like REITs, InvITs are also listed on stock exchanges. - FPOs (Follow-on Public Offers)
FPOs happen when a company that’s already listed on the stock exchange issues additional shares to raise more capital. Companies launch FPOs to fund expansion, reduce debt, or meet working capital needs. FPOs give new and existing investors another chance to invest in the company.
Types of IPO Investors
When a company launches an IPO, it divides the shares into three main investor categories. Each category has a fixed reservation limit:
- Retail Individual Investors (RIIs) – Up to 35%
Retail investors are individuals like you and me who invest up to 2 lakh in an IPO. The company reserves up to 35% of the total IPO issue for retail investors. - Qualified Institutional Buyers (QIBs) – Up to 50%
QIBs include mutual funds, insurance companies, pension funds, foreign portfolio investors (FPIs), and banks. They are large, experienced investors. IPOs reserve up to 50% of the issue for QIBs. - Non-Institutional Investors (NIIs) – Up to 15%
NIIs are high-net-worth individuals (HNIs), companies, and trusts who invest more than 2 lakh. The company keeps up to 15% of the IPO for this category.
Benefits of Investing in IPO
Investing in an IPO offers several advantages, especially for early investors:
- Early Entry Opportunity
IPOs let you invest in a company before its shares start trading on the stock market. This early entry gives you a chance to be part of the company’s growth journey from the beginning. - Potential Listing Gains
If the IPO is in high demand, the stock may list at a price higher than the issue price. This can give you instant profits on the listing day. - Long-Term Growth Potential
Many IPOs belong to growing companies with strong future prospects. If you hold the shares long-term, you may earn substantial returns as the company expands.
Risks of Investing in IPO
While IPOs offer good opportunities, they also carry certain risks. It’s important to understand them before investing:
- Price Volatility
After listing, the stock price can fluctuate sharply. In some cases, it may fall below the issue price, leading to early losses. - Limited Information
New or lesser-known companies often have limited financial history and public data. This makes it harder to evaluate their true potential. - Overhyped Valuation
Some companies launch IPOs at high prices based on future growth expectations. If the growth doesn’t meet those expectations, the stock may underperform.
Always read the Draft Red Herring Prospectus (DRHP) and review the company’s financials, business model, and risks before investing in any IPO.
How to Apply for an IPO Online?
- Log in to your demat account or trading app.
- Go to the IPO section.
- Select the IPO you want to apply for.
- Enter the bid price and quantity.
- Complete the payment using UPI or ASBA method.
- Check allotment status after the issue closes.
Final Thoughts
An IPO is a great opportunity to invest in a growing company, but it’s important to do proper research before applying. Not every IPO gives profits. Check the company’s background, financials, and industry outlook.
Always invest wisely and avoid herd mentality.
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