What is the difference between a private and a public company?

A private company is owned by a small group of individuals, founders, or institutional investors. Its shares are not traded on a public stock exchange. A public company has sold its shares to the general public through an IPO, and these shares are freely traded on exchanges like the NSE and BSE.

Can I sell my allotted IPO shares on the listing day itself?

Yes. Once the shares are credited to your DEMAT account, you have complete ownership. You can sell them on the day of listing, a week later, or hold them for the long term. There is no lock-in period for retail investors in an IPO.

What happens to my money if I don't get an IPO allotment?

If you do not receive an allotment, the amount that was blocked in your bank account via ASBA or UPI mandate is released. The money is never debited from your account. The block is typically removed within a day or two of the allotment finalisation.

Is it better to bid at the Cut-Off price or a specific price?

For a retail investor, bidding at the 'Cut-Off' price is generally advisable. It increases your chances of allotment because your application is considered valid regardless of what the final discovered price is (as long as it's within the price band). Bidding at a lower price might result in your application being rejected if the final price is set higher.

How is the IPO lot size decided?

SEBI mandates that the application value for a single lot should fall in the range of ₹10,000 to ₹15,000. The company, along with its merchant bankers, determines the lot size to ensure the value of one lot is within this prescribed range. For example, if the upper price band is ₹500, the lot size might be set at 30 shares (30 x 500 = ₹15,000).

Is Grey Market Premium (GMP) a reliable indicator?

No, GMP is not reliable. It is an unofficial, speculative indicator from an unregulated market. While it can sometimes reflect market demand, it can also be easily manipulated and can change drastically before listing. Basing investment decisions solely on GMP is extremely risky.

What is an IPO? How IPOs Work in India

What is an IPO? How Initial Public Offerings Work in India

The stock market buzzes with a unique excitement whenever a major company announces its Initial Public Offering (IPO). From the blockbuster debut of Zomato in 2021 to the much-anticipated, colossal launch of LIC in 2022, IPOs capture the imagination of investors, big and small. But what exactly is happening behind the scenes?

Introduction

An Initial Public Offering is the process through which a privately held company becomes a publicly traded company. It achieves this by offering its shares to the general public for the first time. For the company, it's a transformative event—a way to raise substantial capital from the market. For the public, it's the first opportunity to own a piece of that company.

Think of it as a company graduating. It has grown successfully under private ownership—funded by its founders, angel investors, and venture capitalists. Now, it needs a larger pool of capital to fund ambitious expansion, pay off debt, or simply allow its early backers to sell their stake and realise profits. By going public, the company lists its shares on a stock exchange, like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), making them available for anyone to buy and sell.

The IPO Journey: From Private to Public

A company cannot simply decide to list its shares one morning. The journey to an IPO is a lengthy, regulated, and meticulous process overseen by the Securities and Exchange Board of India (SEBI).

Step 1: Hire the Bankers The first move for a company planning an IPO is to appoint one or more investment banks, also known as merchant bankers or book-running lead managers. These firms are the architects of the IPO. They advise the company on timing, valuation, and regulatory compliance. Their job is to manage the entire process, from paperwork to marketing the issue.

Step 2: The DRHP - A Company's Autobiography Next, with the help of lawyers and merchant bankers, the company prepares a crucial document: the Draft Red Herring Prospectus (DRHP). This is an exhaustive document, often running into hundreds of pages, filed with SEBI. The DRHP contains everything an investor would need to know to make an informed decision:

Business Operations: What the company does, its products, and its market.
Financial Health: Audited financial statements for the past several years, detailing revenues, profits, assets, and liabilities.
Risk Factors: A candid section outlining potential risks to the business, from industry competition to pending litigation.
Use of Proceeds: How the company intends to use the money raised from the IPO.
Management Details: Information about the company's promoters and key leadership.

The DRHP is a 'draft' because it doesn't yet contain the final issue price or the exact date of the IPO.

Step 3: SEBI's Scrutiny and Roadshows SEBI reviews the DRHP to ensure it complies with all disclosure norms. The regulator can ask for clarifications or additional information. While SEBI reviews the document, the company's management and its bankers go on 'roadshows'. They meet institutional investors—mutual funds, insurance companies, foreign portfolio investors (FPIs)—to gauge their interest and get a sense of what price they would be willing to pay.

Step 4: Price Band, RHP, and Opening Bell Once SEBI gives its go-ahead, the company finalises the price band. For instance, a company might set a price band of ₹500 - ₹520 per share. The final document, now called the Red Herring Prospectus (RHP), is filed. The IPO dates are announced, and the issue opens for public subscription, typically for 3-5 working days.

Types of IPOs: Understanding the Offer Structure

When you read about an IPO, you'll often see terms like 'Fresh Issue' and 'Offer for Sale'. These describe where the money from the IPO is going.

Fresh Issue: The company creates and sells new shares. The money raised from a fresh issue goes directly to the company. This capital is typically used for purposes outlined in the DRHP, such as building a new factory, acquiring another business, or reducing debt.
Offer for Sale (OFS): Here, existing shareholders of the company, such as the founders (promoters), employees, or early investors (venture capital funds), sell a portion of their own shares. In an OFS, the money does not go to the company; it goes to the selling shareholders. This serves as an exit route for them to cash in on their investment.

Many IPOs are a combination of both. For example, the massive ₹18,300 crore IPO of Paytm in 2021 included a fresh issue of ₹8,300 crore and an OFS of ₹10,000 crore.

Investors also encounter two main pricing mechanisms:

Book-Building Issue: This is the most common method in India. The company offers a 20% price band, and investors bid for shares within this range. The final cut-off price is determined after the issue closes, based on the demand received at various price points. Most large IPOs, like Zomato's or Nykaa's, are book-built issues.
Fixed Price Issue: The company sets a single, fixed price for its shares. Investors can only apply at this specific price. This is now less common and typically used for smaller IPOs.

The Application Process: How Retail Investors Can Apply

Applying for an IPO has become remarkably simple for retail investors. A retail investor is anyone who applies for shares worth up to ₹2 lakh in an IPO. You need a DEMAT account, a trading account, and a bank account.

There are two primary methods:

1. ASBA (Application Supported by Blocked Amount) This is the traditional method, done through your bank's net banking portal.

Log in to your net banking account and find the 'IPO Application' or 'ASBA' section.
Select the IPO you wish to apply for.
Enter your DEMAT account details (Depository Participant ID and Beneficiary ID).
Enter the number of shares you want to apply for in a 'lot'. A lot size is the minimum number of shares you have to apply for, and it's pre-defined by the company. For example, if the lot size is 30 shares and the price is ₹500, a single lot costs ₹15,000.
Choose your bid price. You can bid at any price within the band or select the 'Cut-Off Price' option. Ticking 'Cut-Off' means you agree to pay whatever price is finalised by the company.
Submit your application. The total amount will be 'blocked' in your bank account—it won't be debited, but you won't be able to use it.

2. UPI-based Application This newer method is more popular and is done through your stockbroker's app (like Zerodha's Kite, Groww, or Upstox).

Open your broker's app and go to the IPO section.
Select the IPO and enter the number of lots and your bid price (or choose cut-off).
Enter your UPI ID.
You will receive a mandate request in your UPI app (like Google Pay, PhonePe, or BHIM).
Approve the mandate by entering your UPI PIN. The amount is now blocked in your bank account linked to that UPI ID.

After the IPO closes, the allotment process begins. If you are allotted shares, the blocked amount is debited. If you aren't, the block is released, and the money becomes available to you again.

Decoding IPO Lingo: GMP, Allotment, and Listing

Grey Market Premium (GMP): The Grey Market is an unofficial, unregulated market where IPO shares are traded before they are listed on the stock exchange. The Grey Market Premium (GMP) is the price at which these shares are trading. For example, if an IPO's issue price is ₹500 and its GMP is ₹100, it suggests the market expects the share to list at around ₹600. GMP is a popular but highly unreliable indicator of demand and potential listing price. It can change rapidly and should be treated with extreme caution.

Allotment: What happens if an IPO receives applications for more shares than are available? This is called oversubscription. In the retail category, if an IPO is oversubscribed, the allotment is done via a computerised lottery system. It doesn't matter if you applied for one lot or the maximum of ₹2 lakh; your chance of getting one lot is the same as any other applicant. You can check your allotment status on the registrar's website (like Link Intime or KFintech) a few days after the IPO closes.

Listing Day: This is the day the company's shares officially begin trading on the stock exchange. The difference between the issue price and the price at which the share opens for trading is the 'listing gain' or 'listing loss'. Zomato, for instance, had an issue price of ₹76 and listed at ₹115, a handsome listing gain of over 51%. In contrast, Paytm, with an issue price of ₹2,150, listed at ₹1,955 and closed the day at ₹1,564, a painful listing-day loss of 27%.

The Big Question: Are IPOs a Good Investment?

Investing in IPOs can be rewarding, but it is not without significant risks.

The Rewards:

High Listing Gains: The primary allure of IPOs is the potential for quick profits if the stock lists at a significant premium to its issue price.
Access to Growth Companies: IPOs allow you to invest early in potentially high-growth companies that were previously inaccessible.

The Risks:

Market Hype and Overvaluation: IPOs, especially during bull markets, can be accompanied by intense media hype, leading companies to price their shares aggressively. An overvalued IPO leaves little upside for retail investors. The dismal performance of Paytm post-listing is a classic example.
Listing Below Issue Price: There is no guarantee of a positive listing. If market sentiment turns sour between the IPO closing and listing day, or if the issue was overpriced, the stock can list at a discount, causing immediate losses.
Limited Information: While the DRHP is detailed, a company going public has no track record of performance as a listed entity. Its stock price behaviour is unknown.
Volatility: Newly listed stocks are often highly volatile. The price can swing wildly in the initial months as the market tries to find the right valuation for the company.

Successful IPO investing requires more than just applying for every issue that comes along. It demands careful study of the DRHP, understanding the company's business and financials, assessing its valuation relative to its peers, and being aware of the broader market sentiment.

Key Takeaways

An IPO is when a private company first sells its shares to the public to raise capital and get listed on a stock exchange.
The process is regulated by SEBI and involves filing a detailed DRHP, determining a price band through book-building, and then opening the issue for public subscription.
IPOs can be a 'Fresh Issue' (money goes to the company) or an 'Offer for Sale' (money goes to existing shareholders).
Retail investors can easily apply for IPOs up to ₹2 lakh using ASBA via net banking or through UPI on broker apps.
Oversubscription in the retail segment leads to a lottery-based allotment. There's no guarantee you'll get shares.
While IPOs offer a chance for high listing gains, they come with significant risks, including overvaluation and the possibility of listing at a loss. Due diligence is critical.

What is an IPO? A Complete Guide to Initial Public Offerings in India