Have you ever wondered how a company gets listed on the stock market? Or how companies raise huge amounts of money from the public? If yes, then you are already curious about something called IPO, which stands for Initial Public Offering. An IPO is often seen as a big event in the financial world. But what does it really mean? How does it work in India? And why should you care?
What is IPO in the Indian Share Market?
An IPO (Initial Public Offering) is the process through which a private company becomes a public company by offering its shares to the general public for the first time. These shares are listed on a stock exchange, such as the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) in India.
Before an IPO, a company is usually owned by a few founders, investors, and private stakeholders. But after the IPO, anyone from the public can buy shares of the company and become a shareholder.
Example:
Suppose there’s a company named “ABC Pvt Ltd.” It’s been growing fast and now wants to raise Rs. 1,000 crore for expansion. Instead of taking a loan, it decides to go public. It offers 1 crore shares at Rs. 1,000 per share to the public through an IPO. Once listed, anyone can buy or sell ABC’s shares on the stock exchange.
Why Do Companies Launch an IPO?
You may wonder, why would a successful private company want to go public? Here are some major reasons:
1. Raise Funds for Growth
The most common reason is to raise a large sum of money to expand operations, launch new products, repay debts, or enter new markets.
2. Improve Brand Image
Being listed on a stock exchange improves a company’s visibility and credibility in the market. It becomes a recognized public entity.
3. Liquidity for Existing Investors
Early investors or promoters can sell some of their shares in the IPO and cash out partially.
4. Employee Stock Ownership Plans (ESOPs)
Many companies use IPOs to provide value to employees who hold stock options.
How Does the IPO Process Work in India?
The IPO process in India is regulated by SEBI (Securities and Exchange Board of India). It includes several steps to ensure transparency and investor protection.
Let’s walk through the IPO journey step by step:
Step 1: Appointing Advisors
The company appoints merchant bankers, legal advisors, auditors, and underwriters to manage the IPO. These experts guide the entire process.
Step 2: Filing DRHP (Draft Red Herring Prospectus)
The company files a DRHP with SEBI. It contains all key details about the company — financials, business model, promoters, risks, and objectives of the IPO.
Step 3: SEBI Approval
SEBI reviews the DRHP and may ask for clarifications. Once satisfied, it gives its approval to go ahead with the IPO.
Step 4: Fixing Price Band and Lot Size
The company and its bankers decide a price band (say Rs. 500–550 per share) and the minimum lot size for bidding (usually one lot contains a fixed number of shares).
Step 5: Open for Bidding
The IPO opens for 3–5 days for investors to apply. You can bid using your Demat and trading account through your broker or apps like Ventura.
Step 6: Allotment and Listing
Once the bidding closes, shares are allotted. If oversubscribed, a lottery system may be used. Finally, the company gets listed on NSE or BSE, and trading begins.
Types of IPO Investors in India
IPO shares are divided into different categories based on investor types:
1. Retail Individual Investors (RIIs)
2. High Net-Worth Individuals (HNIs)
3. Qualified Institutional Buyers (QIBs)
4. Anchor Investors
Methods of IPO Pricing in India
There are two main ways a company can price its IPO:
1. Fixed Price Issue
2. Book Building Issue
Most Indian IPOs today follow the book-building method as it is more market-driven.
Recent Trends in Indian IPO Market
India has seen a boom in IPOs over the last few years. Big names like Zomato, Nykaa, Paytm, and LIC launched IPOs that attracted massive investor attention.
In FY 2023–24 alone, over 50 companies launched IPOs, raising more than Rs. 50,000 crore from the market. This shows the growing appetite for equity investments among Indians.
Advantages of Investing in IPOs
If done wisely, IPOs can be a profitable investment opportunity. Here’s why people invest in IPOs:
1. Early Entry
You get the chance to invest in a company before it grows big in the market.
2. Listing Gains
Many IPOs get listed at a premium. Investors can make quick profits on listing day.
3. Long-Term Growth
If the company performs well, IPO shares can offer strong long-term returns.
4. Transparent Disclosures
SEBI regulations require companies to disclose detailed information, reducing risk.
Risks of Investing in IPOs
While IPOs offer potential rewards, they also come with risks:
1. Overvaluation
Some companies price their IPOs too high, hoping to cash in on market hype.
2. Poor Listing Performance
Not all IPOs perform well after listing. Paytm, for example, saw a major drop after listing.
3. Limited Historical Data
Since IPOs are fresh issues, long-term performance data is missing.
4. Market Volatility
External factors like interest rates or political events can impact IPO success.
How to Analyze an IPO Before Applying?
To make smart IPO investments, consider these factors:
1. Company Background
Understand the business model, promoters’ track record, and competitive edge.
2. Financial Health
Check revenue, profit trends, and debt levels in the DRHP.
3. Use of IPO Proceeds
Where will the raised money be used? For growth or debt repayment?
4. Valuation
Compare the IPO price with peers in the same industry.
5. Market Sentiment
Positive or negative buzz can influence listing gains.
How to Apply for an IPO in India?
It’s easy to apply for an IPO these days using technology. Here’s how:
Step-by-Step Process:
Taxation on IPO Profits in India
1. Short-Term Capital Gains (STCG)
If you sell shares within 1 year of allotment, gains are taxed at 15%.
2. Long-Term Capital Gains (LTCG)
If you sell after 1 year and your gains exceed Rs. 1 lakh in a financial year, you pay 10% tax.
No tax applies at the time of IPO allotment, only when you sell the shares.
Key Terminologies to Know in IPOs
Here are some must-know terms if you’re investing in IPOs:
If you're planning to invest in IPOs (Initial Public Offerings), it's important to understand some key terminologies that are commonly used in the process. Here are a few must-know terms explained in a theoretical form:
DRHP (Draft Red Herring Prospectus) refers to a preliminary document that a company files with SEBI (Securities and Exchange Board of India) before launching an IPO. This document contains essential information about the company's business, financials, objectives of the IPO, and potential risks involved. It helps investors make informed decisions.
Price Band is the range of prices within which investors can place their bids for shares during the IPO. The company, in consultation with the lead managers, decides this range. The final price at which shares are allotted is usually within this band and is determined through the book-building process.
Lot Size indicates the minimum number of shares that an investor must apply for in an IPO. Retail investors can apply in multiples of this lot size. It ensures uniformity in applications and simplifies the allotment process.
Oversubscription happens when the number of shares applied for by investors exceeds the number of shares offered by the company. This is a sign of high demand and often leads to allotment through a lottery system, especially in the retail investor category.
Grey Market is an unofficial market where IPO shares are bought and sold before they are officially listed on the stock exchange. The grey market premium (GMP) gives an indication of how the IPO might perform on listing day. However, it's important to note that this market is not regulated.
Listing Date is the day when the shares of the company start trading on the stock exchange. It marks the official entry of the company into the stock market and is closely watched by investors, as the share price on this day reflects initial market sentiment and demand.
Understanding these terms can help you navigate the IPO process more confidently and make informed investment decisions.
IPO vs FPO – What’s the Difference?
You may also hear about FPOs (Follow-on Public Offerings). Here’s how they differ:
You may also come across the term FPO, which stands for Follow-on Public Offering. While IPOs and FPOs are both ways for companies to raise money from the public, there are some key differences between the two.
An IPO, or Initial Public Offering, is when a company offers its shares to the public for the first time. It marks the company’s entry into the stock market. In contrast, an FPO is when a company that is already listed on the stock exchange issues additional shares to raise more capital.
The purpose of an IPO is usually to raise fresh capital for growth, expansion, or to list the company’s shares on the stock exchange. An FPO, on the other hand, is mainly used to raise more funds after the company has already gone public.
In terms of risk, IPOs are generally considered riskier because investors are putting their money into a company that hasn’t been publicly traded before. There is limited public data and no prior market performance to evaluate. FPOs are seen as less risky since the company already has a track record in the stock market.
When it comes to investor interest, IPOs tend to attract a lot of attention and enthusiasm, especially if the company has strong fundamentals or operates in a trending sector. FPOs usually witness moderate interest since the excitement of the first-time listing is absent.
Understanding these distinctions can help you decide which investment opportunity aligns better with your risk appetite and financial goals.
Famous IPO Success Stories in India
Infosys IPO (1993):
Offered at Rs. 95. Now worth over Rs. 1,500+ per share. A true wealth-creator!
TCS IPO (2004):
Raised Rs. 5,420 crore. Turned into India’s top IT firm.
Zomato IPO (2021):
India’s first unicorn startup to list. Strong buzz, huge subscription.
Upcoming IPOs to Watch in 2025
Stay updated with the latest IPOs that are expected to hit the Indian stock market:
You can check platforms like Ventura share market broker platform for IPO alerts and updates.
Should You Invest in IPOs?
It depends on your investment style. If you are looking for high-risk, high-reward opportunities, IPOs might interest you. But don’t blindly invest in every IPO just because there is hype.
Do your research, evaluate the risks, and make an informed decision. IPOs can be a great way to diversify your portfolio — if you pick the right ones.
Conclusion: IPOs – Gateway to Wealth or Risk?
An IPO is the gateway for a private company to enter the public market, raise funds, and unlock long-term value. For investors, IPOs provide a chance to invest early in promising companies and potentially earn handsome returns. But it’s not a guaranteed win.
While IPOs like IRCTC or Nykaa have delivered strong returns, others like Paytm have disappointed. That’s why it’s essential to stay curious, informed, and cautious.
Whether you're a beginner or a seasoned investor, IPOs offer an exciting window into India’s evolving economy and financial markets.
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