IPO stands for Initial Public Offering. Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors.
The prospectus is a lengthy document that lists the details of the proposed offerings. It can be accessed by institutional investors, High Net Worth Individuals (HNIs), and the general public to review the details of the first sale of shares.
Once the IPO is done, the shares of the firm are listed and can be traded freely in the open market. The stock exchange imposes a minimum free float on the shares — both in absolute terms and as a ratio of the total share capital — to ensure sufficient liquidity for investors.
Companies first seek out the counsel of investment banks and underwriters to start the IPO process. This team analyzes the company's financials and then signs the underwriting agreement with the details of the amount to be raised and the securities to be issued.
The company files a registration statement along with the Draft Red Herring Prospectus (DRHP), containing financial information, business details, management info, probable price per share, business plans, risk reports, and mandatory disclosures. Documents must be submitted to the local Registrar of Companies at least 3 days before the offer opens for public bidding. The Red Herring Prospectus (RHP) is then filed with SEBI. Upon compliance, the company receives approval and the IPO date is set.
The company finalizes the stock exchange where it will list its shares. Companies can choose to list on both BSE and NSE as well.
Prior to the IPO going public, there are usually two weeks where company executives travel across the country to market the IPO to potential investors, majorly QIBs in major financial hubs. The agenda is to build interest by presenting company data. Some large entities may also get a chance to purchase stocks at a set price prior to going public.
The price band is fixed through either of two methods — the Fixed Price Method (where the company works with underwriters to set a share price) or the Book Building Method (where a price band is set and investors bid within it, with final prices dependent on demand and target capital). Companies can set the cap price at 20% more than the floor price, with books open for three days. The IPO GMP (Grey Market Price) is the premium investors are willing to pay before official listing.
Application forms are made available to the public on a fixed date — SEBI has fixed this availability period at 5 working days in most cases. Once bidding closes, the final prospectus is submitted to SEBI and ROC. Securities are credited to investors' demat accounts, with refunds in case of oversubscription. Shares are allotted to bidders within 10 days of the last bidding date, after which market trading begins.
Terms Associated with IPO: To have informed knowledge about an IPO, it is necessary to understand the basic terms used in the process — such as DRHP, RHP, price band, book building, GMP, QIB, oversubscription, and demat account.
The company and underwriters analyze its liabilities, assets, and financial data to fix the price per issue in advance. The order document justifies the price with quantitative and qualitative aspects. Demand for securities is only known once the issue is closed. Oversubscription levels are sometimes high for fixed price offerings.
Price discovery takes place during the IPO process through a price band — the lowest being the floor price and the highest the cap price. Investors submit bids for their chosen share quantity at their preferred price. The final share price is fixed based on these bids. Demand is known each day as the book building takes place.
Fixed Price methods may undervalue shares at the IPO, with the price mostly lower than market value — leading to more sales and positive revaluation by investors.
Book Building ensures higher efficiency by matching supply and demand before price is fixed, giving the company a fairer return and investors an upside.
| Aspect | Fixed Price Issue | Book Building Issue |
|---|---|---|
| Price | Fixed in advance | Determined via bidding (price band) |
| Demand Visibility | Known only after issue closes | Known daily during book building |
| Price Discovery | Pre-determined by underwriters | Market-driven through investor bids |
| Oversubscription | Often high | Managed via price band adjustments |
| Fairness | May undervalue shares | Fairer return for the company |
Going public assists management in gaining more reputation and credibility by becoming a trustworthy organisation. Publicly traded companies are typically more well-known than their private competitors, and a successful IPO attracts significant media attention in the financial sector.
A corporation may never receive more capital than it raises by going public. The substantial cash available can substantially alter a company's growth trajectory — helping fund R&D, hire new employees, establish facilities, pay off debt, and acquire new technologies.
When a corporation goes public, its shares are traded on an exchange amongst investors, increasing investor diversity. No single investor owns a majority of outstanding stock, helping investors diversify their portfolios by purchasing stock in a publicly listed company.
Going public encourages managers to prioritize profitability over other objectives such as growth or expansion. It also enforces transparency with shareholders, as companies cannot conceal challenges or underperformance from the public eye.
When a company goes public, it gains an independent perspective on its business model, marketing strategy, and other factors that could hinder it from becoming profitable — offering external insights that internal teams may otherwise overlook.
IPOs can be quite costly. Aside from the continuous costs of regulatory compliance for public firms, the IPO transaction process necessitates the investment of capital in an underwriter, an investment bank, and an advertiser to ensure that everything runs smoothly.
Public companies are led by a board of directors that reports directly to shareholders rather than the CEO. Even if the board delegates authority to a management team for day-to-day operations, the board retains the final say — including the authority to fire CEOs and founders. Some businesses circumvent this by going public in a way that grants its founder veto power.
In the midst of market turmoil, publicly traded firms are under enormous pressure to keep their stock values high. Executives may be unable to make bold decisions if the stock price suffers as a result. This occasionally leads to sacrificing long-term planning in favour of immediate short-term gratification.
Before investing in an IPO, it is essential to carefully weigh these risks against the potential benefits. Thorough research into the company's financials, management team, and market conditions can help investors make more informed and confident decisions.
Learn the complete step-by-step process to apply for an IPO in India — from opening a Demat account to checking allotment status.
How to Apply for IPO