- The Basics: What is an IPO?
At its core, an IPO (Initial Public Offering) occurs when a company sells its equity shares (or convertibles) to the public for the first time and gets listed on a stock exchange.
In India, the Securities and Exchange Board of India (SEBI) describes an IPO as follows:
When an unlisted company makes a fresh issue of shares or convertible securities or offers existing shares or convertible securities for sale (or both) to the public for the first time, it is called an IPO.
Key points to note for IPO:
- An “unlisted company” becomes a listed company through an IPO.
- It may issue new shares (to raise fresh capital) or an existing shareholder may sell shares (offer for sale), or both.
- After the IPO, the company’s shares can be traded on one or more stock exchanges, such as the National Stock Exchange of India (NSE) or the Bombay Stock Exchange (BSE).
Why the terminology matters
The term “going public” is widely used: the firm opens its equity ownership to the general public. For companies in India, this means more compliance, increased transparency, and new stakeholders.
- Why Do Companies Launch IPOs? (Motives in Indian Context)
Companies choose to launch an IPO for several strategic reasons. In India, many of these reasons align with specific market conditions.
Key reasons include for Launch IPO:
- Raising capital for growth – When a company needs funds for new projects, expanding capacity, or reducing debt, going public enables it to raise equity capital.
- Providing exit or liquidity to early investors – Many startups, private equity firms, or founders may want to partially cash out their investments through an IPO.
- Improving credibility and market visibility – A listed company often gains more recognition, easier access to future capital markets, and enhanced brand value.
- Facilitating share trading – Once listed, shareholders (promoters, early backers) have a marketplace for their shares, which can be traded.
- Expanding the investor base – Public listings allow retail investors, institutions, and foreign investors (within regulatory limits) to participate, benefiting from a wider pool of capital.
- A roadmap for future capital raising – Once listed, a company can raise additional funds more easily through follow-on public offerings (FPOs) or rights issues.
Indian-specific factors:
- India’s economic growth, increasing number of retail investors, and the maturity of its capital markets make IPOs a feasible option for firms, rather than relying solely on bank loans or private placements.
- Regulatory efforts and the stock exchange infrastructure (NSE, BSE) have improved.
- For promoters, listing brings prestige in Indian business culture, which can aid in forming partnerships and building brands.
- Eligibility & Regulatory Framework in India
For a company in India to initiate an IPO, it must meet specific eligibility criteria and regulatory steps.
Regulatory framework:
- SEBI is the primary regulator for public issues and disclosures. The company must file a Draft Red Herring Prospectus (DRHP) or similar document with SEBI, gain approval, and then proceed with the IPO.
- Stock exchanges like NSE and BSE will list the company after the allotment and listing process.
- There are set norms regarding financials, corporate governance, and promoter shareholding.
Eligibility criteria (main board IPO):
According to available information, the eligibility requirements include:
The company must be a public limited company.
- Minimum track record: at least 3 years of operations.
- Minimum net tangible assets in each of the last 3 years, as well as minimum net worth.
- Minimum average pre-tax profit for the last 3 years for main board listing.
- Promoter shareholding requirements and a lock-in period.
It’s important to note that smaller companies can list on SME platforms (for example, the SME listing segment) with different norms.
- For instance, NSE EMERGE is a platform for SMEs in India.
Classification of issues:
Public issues in India are categorized as:
- IPO (Initial Public Offering)
- FPO (Further Public Offer) – a listed company offering more shares to the public.
- Rights Issue, Bonus Issue, etc.
Important disclosure & compliance obligations:
Once a company decides to go public, it must fully disclose financials, risk factors, business model, management, promoters, and use of proceeds. This transparency is meant to protect investors’ interests.
- The IPO Process in India – Step by Step
Here’s a typical process that a company in India follows to transition from private to public through an IPO.
Step 1: Mandate and Appointment of Intermediaries
- The company picks merchant bankers (lead managers), underwriters, registrars, legal advisors, auditors, and others.
- These intermediaries help structure the offering, prepare documentation, and arrange roadshows.
Step 2: Due Diligence and Drafting of Offer Document
- The company and its advisors conduct financial and legal due diligence.
- A Draft Red Herring Prospectus (DRHP) or a similar document is created, containing detailed disclosures.
- This document is submitted to SEBI and the stock exchanges for review.
Step 3: Approval and Marketing (Roadshow)
- After SEBI reviews the document, it is approved.
- The company and lead managers promote the issue to institutional investors and anchor investors.
- The price band (for book-building) is set, and lot size is determined.
Step 4: Subscription Period (IPO opens)
- The IPO opens for subscriptions from different categories: Retail Individual Investors (RIIs), Non-Institutional Investors (NIIs), and Qualified Institutional Buyers (QIBs).
- In India, the ASBA (Applications Supported by Blocked Amount) process is commonly used for applications.
Step 5: Allotment and Credit of Shares
- Once the issue closes, the basis for allotment is established, particularly if the IPO is oversubscribed.
- Shares are allotted accordingly; the application money is only debited for shares obtained. For other applications, funds are released or unblocked.
Step 6: Listing on Stock Exchange
- The allotted shares begin trading on the designated stock exchange.
- At this point, the company becomes publicly listed, and its shares are available for trading in the open market.
Step 7: Post-listing obligations
- The company must comply with listing regulations, including periodic disclosures (quarterly and annual), corporate governance standards, and promoter lock-in rules.
- The promoter lock-in is usually set for a specific period to promote stability, although details may vary.
- Key Features & Mechanisms in India
Book-building vs Fixed-price issue:
- Most Indian IPOs follow the book-building method: the company sets a price range (e.g., ₹100-₹110) and investors bid within that range; the final price is determined based on demand.
- In a fixed price issue, the company sets the share price beforehand; investors apply at that price.
Lot size and minimum investment:
- IPOs are issued in lots (the minimum number of shares you must apply for). The application size depends on the price and lot size.
Category allocations:
India’s IPO framework generally classifies investors into categories:
- Retail Individual Investors (RIIs) – smaller investors.
- Non-Institutional Investors (NIIs) – usually high net worth individuals.
- Qualified Institutional Buyers (QIBs) – institutions such as mutual funds, insurance companies, and foreign institutional investors (FIIs) (within regulatory limits).
Allocation rules define the portion of the issue set aside for each category.
The ASBA mechanism:
The ASBA (Applications Supported by Blocked Amount) process ensures that the application money stays in the investor’s bank account and is only withdrawn if shares are allotted. This approach helps prevent misuse of funds and enhances investor protection.
Grey Market Premium (GMP):
In India, before the IPO lists, there is an informal “grey market” where shares may be traded unofficially. The Grey Market Premium (GMP) can serve as a demand signal (although it is not regulated).
Lock-in of promoter shares:
Promoter (original owners) shares are usually locked in for a period (often 3 years) to align interests and prevent them from exiting immediately after listing.
- Benefits and Risks of IPOs (for Companies & Investors)
For companies:
Benefits:
- Access to a large pool of capital, which can propel growth, pay off debt, and fund new projects.
- Enhances credibility, brand value, and public image.
- Provides liquidity for early investors and promoters.
- Eases future fundraising through public markets.
Risks / Costs:
- Significant expenses: underwriting fees, legal and registration costs, compliance, and investor relations.
- Loss of control: promoters may hold a smaller percentage after the issue, leading to more stakeholders and obligations.
- Market pressure: Listed firms must meet performance expectations and face scrutiny from analysts and shareholders.
- Public disclosure: Companies must reveal financials, business risks, and future strategies, which competitors may exploit.
For investors:
Highlights / opportunities:
- Early participation in a company’s growth can yield significant listing gains.
- Opportunities for diversification: Access to companies that were previously privately owned.
- Liquidity: Once listed, shares can be traded in the secondary market.
Risks:
- Valuation risk: IPOs can be driven by hype and may be overpriced compared to fundamentals.
- Limited track record: Some firms may have shorter histories or higher risk profiles.
- Lock-in and volatility: Shares can be volatile even after listing. A company’s future performance may not align with promises made during the IPO.
- Allotment risk for retail investors: In oversubscribed IPOs, retail investors may not receive their full allotment.
- Special Considerations for Indian Investors
Access & Eligibility:
- Any resident Indian with a PAN card, Demat account, and bank account can apply for an IPO (subject to minimum lot requirements and cut-off prices).
- Applying through ASBA ensures that funds are blocked but not debited until after allotment.
Timing & allotment dynamics:
- Expectation of listing gains: Many retail investors pursue IPOs for quick gains when shares list above the issue price. However, this is not guaranteed.
- Oversubscription: Many IPOs attract heavy interest, leading to very small or no allotments for retail investors.
- Post-listing lock-in: Promoter lock-in can impact share liquidity.
Market hype vs fundamentals:
- In India, IPOs often receive significant media coverage and public excitement. However, some sources warn that “new-gen” IPOs might be overhyped and may not always deliver solid long-term fundamentals.
- It’s critical to read the prospectus, grasp the business model, competitive landscape, valuation, and planned use of funds.
Regulatory regime changes:
- The Indian IPO market may undergo regulatory changes by SEBI (such as allocation shifts between retail and QIBs). Investors need to stay informed about evolving regulations.
SME listings:
- Besides main board listings, SMEs and startups can list on SME platforms with less stringent norms but face higher risks. For example, the NSE’s SME platform.
- What to Look At Before Investing in an IPO in India
As an investor thinking about an IPO, here are some items to consider:
- Business model & competitive advantage – Is the company in a growing industry? Does it have sustainable advantages?
- Financial history – Review revenue growth, profitability, margins, debt levels, and cash flow.
- Promoter background – Consider their experience, integrity, past performance, shareholding, and lock-in terms.
- Use of IPO funds – Will the money be allocated for growth or just for promoter exits or repayments?
- Valuation / price range – Does the issue price make sense compared to peers and future growth potential?
- Risk factors in the prospectus – Regulators mandate risk disclosures; assess which are significant.
- Allotment size & category limits – Particularly for retail: what is the lot size, minimum investment, and expected share quantity?
- Subscription trend & grey market signals – Although grey market premiums are unofficial, subscription levels can indicate demand.
- Lock-in restrictions – For promoters, shares sold via offer for sale, etc.
- Listing date & post-listing strategy – Understand when listing will occur and what trading might look like in the secondary market.
- Recent Trends & the Indian IPO Landscape
The IPO market in India has experienced notable developments:
- India is witnessing strong IPO activity, with reports suggesting it may have a record year for IPOs.
- Regulatory changes: For significant issues, SEBI proposed lowering retail allocations while increasing institutional investor quotas.
- A rise in “new-age” company IPOs (such as tech, fintech, and platform businesses) alongside traditional sectors.
- More SMEs and startups are considering listing or alternative routes.
These trends indicate a more dynamic IPO environment in India—offering more opportunities but also necessitating careful evaluation.
- What Happens After the IPO? Post-listing & Beyond
After the shares start trading, several things happen:
Immediately after listing
- The share price may open above or below the issue price, based on demand, supply, and market sentiment.
- Some IPOs see early gains; others may experience a price drop.
- Liquidity might be limited for a few days, and the free float can be small at first.
Long-term company obligations
- As a listed company, following listing regulations, corporate governance standards, quarterly disclosures, periodic financial reporting, and maintaining ongoing investor relations becomes required.
- Insider trading rules, changes in shareholding disclosure, and related-party transactions are monitored closely.
- Promoters may face lock-in periods, commonly three years for their shares, though these rules can vary.
Investor behavior
- After listing, investors choose whether to hold shares long-term or trade short-term. Holding long-term can match company growth, while trading may seek quick gains.
- Some IPOs turn out to be great long-term investments; others may disappoint due to poor execution, market changes, high valuations, or management problems.
- Common Myths & Misconceptions About IPOs in India
Here are a few misunderstandings that investors often have:
- Myth: “All IPOs yield big listing gains.”
- Reality: While many IPOs in India open higher than their issue price, that isn’t always the case. Several IPOs list at par or even lower, which can lead to underperformance.
- Myth: “A heavily oversubscribed IPO means huge future gains.”
- Reality: Oversubscription indicates demand, but the company’s fundamentals are more important. A high grey market premium (GMP) is speculative and unregulated.
- Myth: “IPOs guarantee visibility and lower risk.”
- Reality: Being listed provides transparency, but risks still arise from business operations, competition, and execution.
- Myth: “Retail investors always receive allotment and profit.”
- Reality: In many IPOs, retail allotment can be very limited due to oversubscription, and profit is not assured.
- Myth: “Once listed, company performance is stable.”
- Reality: Public companies deal with intense scrutiny, market cycles, and business risks; listing marks the start of a new phase.
- Conclusion for IPO
An IPO is a significant event for a company, marking its entry into the public sphere. For Indian investors, it provides an opportunity to participate in the early stages of a company’s growth. For the company, it offers access to growth capital, increased visibility, and wider ownership. However, like all investments, IPOs come with risks: market risk, valuation risk, execution risk, and business risk.
In India, the regulatory environment, including SEBI and stock exchanges, has improved. Processes like ASBA, book-building, lot sizes, and allocation categories now provide more transparency than in past decades. Still, whether you’re a retail investor thinking about applying or a company considering an IPO, the key is to do your homework: review the prospectus, evaluate fundamentals, understand risks, and match them to your investment goals and strategy.
If you are a retail investor in India, view IPOs as one part of your investment portfolio, not as a guaranteed path to profit. If you are a company promoter, plan your IPO with a clear strategic purpose, not just for short-term listing gains.
By understanding what an IPO involves — from its definition to the process, regulatory checks to post-listing responsibilities — you will be better prepared to navigate this exciting but complex area of India’s capital markets.