When a company goes public through an IPO, its shares become available to investors. IPOs help raise funds for growth and connect businesses with investors, enhancing transparency in the Indian market.
What is an IPO
An IPO is the process through which a private company offers its shares to the public for the first time. This act of “going public” enables the company to be listed on recognised stock exchanges such as NSE and BSE. Once listed, its shares can be freely traded in the open market.
Several key participants ensure that the process is transparent, compliant, and fair:
- Securities and Exchange Board of India (SEBI): Regulates and approves IPOs to protect investors.
- Merchant Bankers (Lead Managers): Draft the prospectus, set pricing, and manage the issue.
- Underwriters: Guarantee share sales to meet fundraising goals.
- Registrars: Handle investor records, allotments, and refunds.
- Retail and Institutional Investors: Apply for shares during the IPO.
Why Companies Opt for IPOs
Companies pursue IPOs for strategic and financial reasons, including:
- Raising capital for expansion and new projects.
- Repaying debt to strengthen financial health.
- Enhancing brand visibility and public trust.
- Allowing early investors to partially exit.
- Offering stock-based incentives to employees.
The IPO Process in India
The IPO process in India follows a defined structure and is regulated by SEBI. The following steps summarise the journey from a company’s decision to go public to its eventual listing:
- Drafting the Draft Red Herring Prospectus (DRHP) and Regulatory Approval
- Pricing the Issue
- Application and Allotment
- Listing on the Stock Exchanges
Each stage serves a specific function that ensures transparency, compliance, and fairness in the offering.
Drafting the DRHP (Draft Red Herring Prospectus)
The Draft Red Herring Prospectus (DRHP) is the foundation of an IPO, offering detailed information to ensure transparency and safeguard investor interests. It includes:
- The company’s financial statements and business model
- Details of promoters and management
- Risks associated with the business
- Use of funds raised through the IPO
- Legal and regulatory disclosures
The DRHP is filed with SEBI to provide key company insights and is reviewed for legal and disclosure compliance. SEBI’s approval ensures transparency and builds investor confidence before the IPO.
Pricing Methods in IPOs
The pricing of shares is one of the most critical aspects of an IPO subscription. In India, companies can choose between two main pricing mechanisms:
| Pricing | Method What It Means | Common Use |
| Fixed Price Issue | A set price is announced in advance. | Used in simpler IPOs. |
| Book Building Issue | Investors bid within a price band; final price is based on demand. | Preferred in most IPOs today. |
Book building has become the preferred mechanism in India as it allows market-driven price discovery, reflecting real investor demand.
Application and Allotment
Investors can apply for an IPO through UPI or ASBA, where funds are blocked from their bank accounts. The process includes:
- Submission of application with fund blocking via UPI or ASBA.
- Closure of IPO subscription window and evaluation of applications.
- Share allotment proportionate to demand or by lottery based on category.
- Credit of allotted shares to investors’ Demat accounts.
- Refund of unallotted amounts to linked bank accounts.
Listing on Stock Exchanges
Post allotment, the company’s shares are listed on stock exchanges such as NSE and BSE. The listing price is determined by market demand and supply. As per SEBI regulations, promoter shares are typically subject to a lock-in period, restricting immediate sale after listing.
Significance of IPOs for the Market
IPOs contribute to the development of the financial ecosystem by:
- Bringing transparency through mandatory disclosure of financial and operational information
- Increasing public participation by enabling retail investors to own shares in growing companies
- Strengthening capital markets by encouraging investment and market depth
- Promoting corporate governance with stricter norms for listed companies
- Boosting economic growth by funding innovation, expansion, and job creation
Common Misconceptions Around IPOs
Below are common IPO myths that need to be dispelled:
- All IPOs Guarantee Listing Gains: Listing day performance depends on demand, valuation, and market mood. Not all IPOs yield instant gains.
- IPOs are Risk-Free: Like all equity investments, IPOs carry risk. Poor fundamentals or overvaluation can lead to losses.
- Only Big Companies Issue IPOs: Many small and medium enterprises (SMEs) also go public to raise growth capital.
- Subscription Guarantees Allotment: Oversubscription can result in partial or no allotment, especially for popular issues.
Conclusion
IPOs allow companies to access much-needed capital while offering investors opportunities to participate in wealth creation. Understanding its process and significance can enable investors to make informed choices.
Disclaimer: No Business Standard Journalist was involved in creation of this content