An initial public offering, or IPO, is how a company sells shares to the public for the first time and gets listed on a stock exchange. It is sometimes made to sound mysterious. In practice it follows a sequence of regulated steps. This guide describes the process only, not whether any offer is worth applying for.
Why companies do it
Companies list to raise money for expansion or to repay debt, to let early investors sell part of their stake, to gain visibility, or to create tradable shares for employees. An IPO can include a fresh issue (new shares, money goes to the company), an offer for sale (existing holders sell, money goes to them), or both.
The stages
- Preparation. The company appoints merchant bankers (lead managers), auditors, legal counsel and others, and prepares its financials and disclosures.
- Draft filing. It files a Draft Red Herring Prospectus (DRHP) with the market regulator, SEBI. The draft is also made public so that anyone can read it and comment.
- Regulatory review. SEBI examines the document and may ask for changes. Once satisfied, it issues observations, which allow the company to proceed. These are not an endorsement of the offer or its price.
- Final prospectus. The company files the Red Herring Prospectus (RHP) with the registrar of companies, including the price band and the dates. It contains risk factors, financials, use of proceeds and details of promoters and management.
- Anchor round. Typically one working day before the offer opens, a portion is allotted to anchor investors, who are large institutions.
- The offer. The issue stays open for a few working days. Investors bid within the price band, through their bank account using UPI or ASBA. Categories include retail, non-institutional and qualified institutional buyers, each with its own allocation.
- Basis of allotment. After closing, the registrar tallies bids. If demand exceeds the shares available in a category, shares are allotted by rules, sometimes by lottery for retail applicants.
- Refunds and credit. Money is unblocked for those who do not get shares, and shares are credited to demat accounts of successful applicants.
- Listing. Shares start trading on the exchange, generally within three working days of the issue closing.
Terms you will meet
- Price band: the range within which bids can be made; the final issue price is fixed within it.
- Lot size: the minimum number of shares in a bid.
- Grey market premium: an unofficial indicator that is not a regulated measure and carries no assurance.
- Lock-in: a period during which certain holders cannot sell their shares.
Reading the prospectus: sections that matter most
- Risk factors. Specific risks the company discloses, from customer concentration to legal cases. Read how specific or generic they are.
- Objects of the issue. How the money raised will be used, and how much goes to the company versus selling shareholders.
- Capital structure. Who owns what before and after the issue, and what share is being offered.
- Financial information. Several years of restated statements, with notes. Apply the same checks you would use for any results.
- Legal and regulatory matters. Pending cases and their amounts.
- Management’s discussion. The company’s own account of its performance.
Common misunderstandings
- “SEBI approval” is not an endorsement. The regulator checks that the required disclosures are present. It does not assess the merits or fix the price.
- Allotment is not guaranteed. When an offer is oversubscribed, applicants in the retail category may be allotted by lottery. Applying for more does not improve the odds within a category beyond the rules set out in the prospectus.
- Listing day is not predictable. A listing price can be above, at or below the issue price. Unofficial indicators have no regulatory standing.
- Money is not lost during the process. The amount is blocked in your bank account while the offer is open and is released if you do not receive shares.
Main board and SME offers
Exchanges also have platforms for smaller companies, with different eligibility, lot sizes and disclosure arrangements. The process is similar in outline, but the rules differ, and the amounts per lot are generally larger. Check which platform an offer is on and read its documents accordingly.
A reading exercise
Pick a recently filed prospectus from the exchange or regulator website. Read only three sections: risk factors, objects of the issue and the financial information. Write down, in your own words, what the company does, how it makes money, what it will do with the funds and how its revenue and profit changed over the years shown. If you can write that in a paragraph, you understand the document well enough to follow discussion about it.
The process is regulated so that information reaches the public in a standard form. That is helpful, but it is not a recommendation, and no part of this description should be taken as a view on any offer.
Where to read
The prospectus is the document that matters. It is free to read and sets out risk factors in plain text. For a longer description of the process, covering the stages from filing to listing with a glossary of the terms above, the process guide is a useful companion. For other primary documents, see a guide on where to find a company’s official filings.
Understanding the process helps you read news about an offer. It does not tell you how a listing will perform, and nobody can promise that.
