IPO: What it Is, Process & How to Apply

What Is an IPO and Why Do Companies Go Public?

A company that has grown beyond the stage where it can be funded by its founders and private investors often faces a choice: borrow money (debt financing) or raise equity capital from a wider pool of investors. An IPO is the most prominent form of the latter. In an IPO, the company - or its existing shareholders, or both - offers shares to the general public for the first time through a formal, regulated process.

The reasons a company chooses to list are varied and often layered. The most straightforward motive is fundraising. A company planning to build a new manufacturing plant, expand into new geographies, repay high-cost debt, invest in research and development, or fund acquisitions needs capital. By selling shares to the public, it can access sums that might be unavailable from any single private investor or lender.

Beyond capital, a listing on NSE or BSE confers significant brand credibility. Being a publicly listed company signals a degree of institutional maturity - audited financials, a board of directors, compliance with SEBI regulations, and ongoing disclosure obligations. This credibility can open doors with suppliers, large corporate customers, and even potential employees who may receive employee stock options (ESOPs).

Another critical reason is providing an exit to early investors. Venture capital funds and private equity firms operate on a defined investment horizon. After nurturing a company for five to ten years, they need a mechanism to return capital to their own investors (limited partners). An IPO, by creating a liquid secondary market for the shares, provides exactly that exit window. This portion of an IPO - where existing shareholders sell their holdings - is called an Offer for Sale (OFS). In an OFS, no fresh capital flows to the company; instead, selling shareholders receive the proceeds.

A typical large IPO contains both a fresh issue component and an OFS component. The fresh issue portion increases the total share count (diluting existing ownership) and raises money for the company itself, which it deploys according to the "Objects of the Issue" declared in the prospectus. The OFS portion transfers existing shares to new public investors without changing the company's total capitalisation.

For investors, the appeal of an IPO is the possibility of participating in the growth story of a company at an early stage of its public life. However, it is important to note that "early stage of public life" does not necessarily mean the company is small or new - many companies list on the stock exchange only after decades of private operation, making them well-established businesses by the time retail investors can access their shares.

Finally, a listing creates a currency. Publicly traded shares can be used for acquisitions (the acquirer offers its own shares in lieu of cash), for ESOPs that can be meaningfully valued and monetised, and as collateral for borrowing. The listing, in other words, transforms an illiquid private asset into a liquid financial instrument with a publicly discoverable price.

Types of Public Issues in India

When people say "IPO," they often mean any public offering - but the regulatory framework in India distinguishes between several distinct types, each with different mechanics and implications for investors.

The first and most common is the Initial Public Offering (IPO) itself - the first time a company's shares are offered to the public. This is the focus of this article. Once a company is listed, any subsequent public offering of shares is called a Follow-on Public Offering or FPO (sometimes called a secondary public offering internationally). An FPO can also be used to dilute promoter shareholding over time to meet SEBI's minimum public shareholding requirements.

The Rights Issue is different: here the company offers new shares exclusively to its existing shareholders, in proportion to their current holdings. It is a way to raise capital while giving existing investors the first opportunity to maintain their ownership percentage. Rights issues are not open to the general public in the same way an IPO is.

An Offer for Sale (OFS) in the context of already-listed companies is a simpler mechanism that allows promoters and large shareholders to sell their holdings on the exchange platform on a dedicated day. This is different from the OFS tranche within an IPO described above.

There is also the SME IPO - a public offering by a small or medium enterprise on the SME platforms of BSE (BSE SME) or NSE (NSE Emerge). SME IPOs have a lower minimum application lot size requirement, slightly relaxed eligibility criteria compared to the mainboard, but also carry proportionately higher risk given the smaller scale of the businesses. SEBI has issued specific guidelines for SME IPOs.

Finally, investors increasingly encounter Institutional Placement Programmes (IPP) and Qualified Institutions Placements (QIP), which are share sales to institutional investors rather than the public - these are relevant to understanding the broader capital markets but are not IPOs in the traditional retail sense.

Understanding these distinctions helps investors correctly interpret news and prospectus documents. A company announcing an "OFS" by its promoter is not raising fresh capital; a company announcing a "fresh issue" is raising money for its stated business purposes; and an FPO indicates the company has already been listed before.

The Regulatory Framework: SEBI's Role

In India, the entire IPO process is regulated and monitored by the Securities and Exchange Board of India (SEBI), the apex capital markets regulator established under the SEBI Act, 1992. SEBI's primary mandate is to protect investor interests, promote the development of the securities market, and regulate market intermediaries.

For IPOs, SEBI's key regulations are captured in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, commonly known as the ICDR Regulations. These regulations specify, among many other things: the eligibility criteria a company must meet to file for an IPO, the mandatory disclosures in the prospectus, the allocation framework across investor categories, the timeline for the process, and the post-listing lock-in requirements for promoters.

Eligibility criteria for a mainboard IPO (as of the time of writing - investors should refer to the current ICDR Regulations for the latest rules) broadly require the company to have a net tangible asset base, a track record of profitability, or - for newer-age companies - the backing of large institutional investors (Qualified Institutional Buyers or QIBs) under an alternative eligibility route. The intent is to ensure that companies going to the public market have a degree of operating history and substantive business.

SEBI mandates that every company file a Draft Red Herring Prospectus (DRHP) with SEBI and the relevant stock exchanges. SEBI reviews the DRHP and may issue observations (colloquially called "SEBI approval"), which allows the company to proceed with the IPO. The DRHP is a public document - available on the SEBI website, the exchange websites, and the websites of the lead managers - and every serious investor should read at least the key sections before applying.

Once SEBI's observations are received and incorporated, the company files the Red Herring Prospectus (RHP) with the Registrar of Companies (RoC) before the issue opens. The RHP contains the price band (the range within which investors can bid) but not the final issue price, which is determined after the book-building process closes. The final prospectus, with the exact price, is filed after allotment.

SEBI also regulates the intermediaries involved in an IPO: the Book Running Lead Managers (BRLMs, i.e., merchant bankers), the registrar to the issue, the bankers to the issue, the syndicate members, and the depositories (NSDL and CDSL). Each intermediary must be registered with and is overseen by SEBI.

The regulator has consistently tightened disclosure norms, shortened timelines (the T+6 listing timeline was a significant reform), and expanded investor protections over the years. Investors can raise grievances related to IPO processes through the SEBI SCORES (SEBI Complaints Redress System) platform.

The Book-Building Process and Price Discovery

Most mainboard IPOs in India use a mechanism called book building to determine the issue price. This stands in contrast to a fixed-price issue, where the price is determined upfront and disclosed in the prospectus. While fixed-price issues still exist - particularly for SME IPOs - book building has become the dominant method for larger listings.

In a book-building issue, the company and its merchant bankers decide on a price band - a floor price and a cap price, with the cap price not exceeding 120% of the floor price (as per SEBI regulations). For example, a price band might be set at ₹400–₹420 per share. Investors are invited to bid at any price within this range or at the cut-off price.

The cut-off price option is significant for retail investors. When an investor bids at the cut-off price, they are essentially agreeing to pay whatever final price is discovered through the book-building process. This is the recommended approach for most retail investors, as it ensures they do not miss the allotment just because they bid below the final issue price.

During the subscription period (which is open for a minimum of three and maximum of ten working days, though most mainboard IPOs are open for three days), bids accumulate from three categories of investors:

Qualified Institutional Buyers (QIBs): These include mutual funds, insurance companies, foreign portfolio investors (FPIs), banks, and other institutional entities. At least 75% of the net issue to the public (in a QIB-heavy allocation structure) is reserved for this category. Institutions must pay 100% of the bid amount upfront.

Non-Institutional Investors (NIIs or HNIs): Individuals and entities applying for shares worth more than ₹2 lakh. At least 15% of the net issue is reserved for this category. NIIs are further divided into sNII (small NII, applying for ₹2 lakh to ₹10 lakh) and bNII (big NII, above ₹10 lakh) sub-categories, each with their own reservation.

Retail Individual Investors (RIIs): Individuals applying for up to ₹2 lakh worth of shares. At least 35% of the net issue is reserved for retail investors. The retail quota is often the most discussed because lottery-based allotment in oversubscribed IPOs is well understood by the general investing public.

After the subscription period closes, the registrar compiles all bids, and the book is "built" - meaning the demand at each price level is tallied. The company and its bankers decide the final issue price (typically at the cap of the price band in most oversubscribed IPOs). Bids at or above the issue price are considered valid; bids below the issue price are rejected and the blocked funds are released.

The book-building process ensures that price is discovered through genuine market demand rather than a single party's estimate, which theoretically leads to more accurate pricing and a more efficient allocation of capital.

Understanding the Prospectus: The DRHP and RHP

The Draft Red Herring Prospectus (DRHP) is perhaps the single most important document in the IPO ecosystem, yet it is one of the most underread by retail investors. The DRHP is a comprehensive disclosure document that the company is legally required to file with SEBI and the stock exchanges before it can formally proceed with an IPO. It runs anywhere from a few hundred to over a thousand pages and covers virtually every material aspect of the company's business, finances, risks, and legal history.

Key sections of the DRHP that every investor should read or at minimum review:

Objects of the Issue: This section tells you exactly what the company plans to do with the money raised. Will the proceeds be used to retire debt, fund capital expenditure, expand working capital, or is the entire issue an OFS (in which case the company itself receives no money)? The objects section is a direct indicator of value creation potential.

Risk Factors: Often running to 50 or more pages, this section lists every risk the company faces - competitive risks, regulatory risks, key person dependency, legal proceedings, and more. SEBI mandates comprehensive risk disclosure. Reading the risk factors is uncomfortable but essential.

Financial Statements: Audited financial statements for at least the past three fiscal years are included. Investors should look at revenue trends, profit margins, debt levels, cash flow from operations (not just net profit), and return on equity.

Management Discussion and Analysis (MDA): This section provides management's own narrative of business performance, including segment-wise revenues, cost structures, and outlook. It is useful for understanding how management thinks about the business.

Promoter and Management Information: Details of promoters, their shareholding, any pledging of shares, and the background of key management personnel are disclosed here. A high level of promoter share pledging can be a red flag.

Litigation and Legal Proceedings: Material legal cases involving the company, its directors, or promoters are listed. Significant ongoing litigation can pose financial and reputational risks.

Once SEBI issues its observations, the company refines the DRHP and files the Red Herring Prospectus (RHP) with the RoC. The RHP is essentially the DRHP with SEBI's comments addressed and the price band added. After allotment, the final prospectus (also called the Prospectus) is filed with the exact issue price.

SEBI mandates that the DRHP be publicly available on the SEBI website, the BSE and NSE websites, and the websites of the book running lead managers. With digital accessibility, there is no barrier to reading this document, and retail investors who take the time to review even the summary sections will be far better equipped to make informed decisions.

Remember: the prospectus is a disclosure document, not a sales pitch (though marketing material from the company may read that way). It is the investor's primary tool for independent due diligence.

How to Apply for an IPO in India: A Step-by-Step Guide

The process of applying for an IPO in India has been significantly streamlined over the years. For retail investors, the preferred route today is through the UPI-based ASBA (Application Supported by Blocked Amount) mechanism, which is mandatory for retail applicants since May 2022.

Step 1 - Ensure Basic Prerequisites Are in Place: To apply for an IPO, you need a valid Permanent Account Number (PAN), a Demat account with one of the two depositories (NSDL or CDSL) through a Depository Participant (DP), a bank account linked to a UPI handle (for the UPI-ASBA route), and a trading account with a SEBI-registered stockbroker (though strictly speaking, you can apply for IPOs without a trading account through the bank's ASBA facility - a trading account is needed only for secondary market transactions).

Step 2 - Read the RHP Before Applying: Before submitting a bid, review the Red Herring Prospectus - particularly the Objects of the Issue, Risk Factors, and Financial Statements. This is not merely a formality; informed decisions begin with reading the document.

Step 3 - Log Into Your Broker's Platform or Bank's ASBA Portal: Most retail investors apply through their stockbroker's app or web platform (such as through Flattrade's IPO application section). Alternatively, investors can use their bank's net banking portal under the "IPO / ASBA" section. Both routes are valid.

Step 4 - Select the IPO and Enter Bid Details: Choose the IPO you wish to apply for (only IPOs that are currently open will appear). Enter the number of lots you wish to bid for. The minimum application is always one lot (the lot size is specified in the RHP). Enter the bid price - retail investors are strongly advised to select the cut-off price option to maximise allotment probability.

Step 5 - Enter Your UPI ID and Submit: For the UPI-ASBA route, enter your UPI ID. This creates a mandate request on your UPI app (BHIM, PhonePe, Google Pay, Paytm, or your bank's UPI app). The funds are not debited immediately - instead, they are blocked (earmarked) in your bank account. You must approve the mandate within the stipulated time (usually by the evening of the day you apply, or by the IPO close date at the latest). Unapproved mandates lead to bid rejection.

Step 6 - Application Confirmation: Once the mandate is approved, you will receive a confirmation of your application. Note the application number. You can check your application status on the registrar's website, NSE's website, or BSE's website using your PAN, application number, or Demat account number.

Step 7 - Allotment and Listing: After the subscription period closes, the registrar runs the allotment process (typically within T+6 days of the IPO close, where T is the issue closing date). If allotment is successful, shares are credited to your Demat account and the blocked amount is debited. If not allotted (fully or partially), the blocked amount is unblocked and the funds are free again. Shares list on NSE and/or BSE on the listing date.

A few important points: An investor can apply from a maximum of three different bank accounts (or UPI IDs) for the same IPO. However, only one application per PAN is permitted - multiple applications from the same PAN are rejected. If you submit through both the broker platform and bank net banking for the same IPO from the same PAN, both will be rejected.

For the NII (HNI) category, applications must be made for more than ₹2 lakh. NIIs cannot use the cut-off price option and must specify a price within the band. For NII and QIB applications above a certain threshold, the process uses the ASBA mechanism through Self-Certified Syndicate Banks (SCSBs) without UPI.

IPO Allotment: How It Works and What to Expect

One of the most frequently asked questions about IPOs is: "Will I definitely get shares?" The honest answer is: it depends on how oversubscribed the issue is and which investor category you are applying in.

For the Retail Individual Investor (RII) category, allotment is done on a lottery basis when the issue is oversubscribed. SEBI's allotment methodology for retail ensures that the maximum number of retail applicants receive at least one lot, before any additional lots are allocated. This is a pro-investor design: it means if an IPO is heavily oversubscribed, a retail investor with one lot bid has roughly the same probability of allotment as one who bid for ten lots (though they receive the same minimum allotment of one lot if selected).

Here is how the retail allotment mathematics works: Suppose the retail category has 10 lakh shares available and there are 50 lakh applications, each for one lot of 10 shares. The total shares available can accommodate only 1 lakh applicants (10 lakh shares divided by 10 shares per lot). In this scenario, 1 lakh applicants are selected by computerised lottery to receive one lot each. Every applicant, regardless of whether they applied for one lot or ten, has the same 1-in-5 chance of selection. If after the lottery there are residual shares (because total selected lots are fewer than total available shares), additional lots may be allotted by another lottery. Funds blocked for non-allotted shares are unblocked promptly.

For the Non-Institutional Investor (NII or HNI) category, SEBI introduced a proportionate allotment methodology in 2022 to replace the earlier draw-of-lots system for large NIIs. For sNII (₹2 lakh to ₹10 lakh applications) and bNII (above ₹10 lakh), the allotment for oversubscribed issues is done proportionately, subject to a minimum allotment of one lot, with further allotment using a computerised lottery.

For QIBs, allotment is proportionate to their valid bids.

Anchor investors are a special sub-category within the QIB portion. SEBI allows companies to allot up to 60% of the QIB portion to anchor investors on a discretionary basis, one day before the IPO opens. Anchor investors must be institutional investors meeting specific criteria, and their shares are locked in for a minimum period post-listing. The presence of reputed anchor investors is often seen as a positive signal for the issue, though it is not a guarantee of listing performance.

Investors can check allotment status on the registrar's website (registrar details are available in the RHP and on exchange websites), NSE's IPO allotment page, or BSE's IPO allotment page using their PAN number or application number. Credit of shares to Demat accounts typically happens the day before listing.

If allotted, the amount is debited from the bank account (UPI mandate is executed). If not allotted, the blocked amount is released - typically within T+1 day of allotment finalisation.

IPO Listing Day: What Happens and What It Means

The listing day is when an IPO's shares first begin trading on the stock exchanges - NSE, BSE, or both. It is one of the most anticipated events in the IPO calendar and also one of the most volatile moments for the share price.

On listing day, the exchange conducts a special call auction (pre-open session) typically between 9:00 AM and 9:45 AM IST specifically for IPO shares, just as it does for regular pre-open sessions. During this window, buy and sell orders accumulate and the discovered price at the end of the session becomes the opening (listing) price for the share. This process aims to reduce the shock of a sharp opening and allow price discovery in a structured manner.

A listing price higher than the issue price is called a "listing gain" or a positive "listing pop." Conversely, a listing price below the issue price is called a "listing loss" or negative listing. The extent of the listing gain or loss depends on multiple factors: the strength of the company's fundamentals, market conditions on listing day (a broad market selloff can hurt even a strong IPO listing), the degree of oversubscription, the quality and intent of anchor and QIB investors, and crucially, whether the IPO was priced aggressively or attractively.

The Grey Market Premium (GMP) is an unofficial, unregulated indicator that gives a sense of the expected listing price based on informal trading of IPO allotments before listing. It is important to note that GMP is not regulated by SEBI, reflects speculative sentiment rather than fundamental value, and has historically been both dramatically accurate and dramatically misleading. Investors should treat GMP as a data point, not a reliable forecast.

For investors allotted shares, listing day is a decision point: should they sell immediately to lock in listing gains, or should they hold for the long term? This is a purely personal decision based on their investment horizon, view of the company's fundamentals, and the price at listing relative to intrinsic value. Educational resources consistently caution against making a quick flip on every IPO listing without any fundamental analysis - some of the best long-term performers in the Indian market started as IPOs where patient holders were rewarded far more than day-one sellers.

For investors not allotted shares, listing day is an opportunity to enter at the market price if they still wish to invest in the company. The market price post-listing reflects supply and demand dynamics in the secondary market. Sometimes listing prices are more attractive for buyers than the IPO issue price (in the case of a weak listing), though this carries its own risks.

After listing, the shares are subject to standard lock-in rules for promoters and anchor investors. Promoters are typically locked in for 18 months (for the minimum required holding) and one year for the balance. Anchor investors are locked in for 30 days (for 50% of their allotment) and 90 days (for the remaining 50%). Retail and NII allottees have no lock-in and are free to sell from day one.

Tax Treatment of IPO Investments in India

Understanding the tax implications of IPO investments is essential for accurate financial planning. In India, gains from the sale of listed equity shares are subject to capital gains tax, and the rates depend on the holding period. Investors should always refer to the latest Finance Act, as tax rates and thresholds are subject to amendment in each Union Budget.

Short-Term Capital Gains (STCG): If you sell your IPO allotted shares within 12 months of allotment, the gains are classified as short-term capital gains from listed equity shares. Refer to the latest Finance Act for the applicable STCG rate.

Long-Term Capital Gains (LTCG): If you hold the shares for more than 12 months before selling, gains above the applicable exemption threshold are taxed as long-term capital gains. Again, consult the latest Finance Act for the current LTCG rate and the exemption limit, as both have been revised in recent Budgets.

Securities Transaction Tax (STT): STT is levied on the sale of listed equity shares on a recognised stock exchange. STT is automatically collected by the broker at the time of the transaction. The purchase of IPO shares through the subscription process does not attract STT (only sale in the secondary market does).

Dividend Income: If the company declares dividends after listing, dividend income is taxable in the hands of the investor at their applicable income tax slab rate. The earlier Dividend Distribution Tax (DDT) regime was abolished, and dividends are now taxable at the recipient's level.

For NRIs applying to IPOs: Non-Resident Indians (NRIs) can apply for Indian IPOs under the Portfolio Investment Scheme (PIS) framework, subject to RBI regulations. Tax deduction at source (TDS) may apply on capital gains for NRI investors. NRIs should consult a qualified tax advisor familiar with cross-border taxation.

Record-keeping is important: maintain records of your IPO allotment price (the issue price), the date of allotment, and the date and price of any subsequent sale. These are required for accurate computation of capital gains for income tax filing purposes. The allotment letter or Demat account statement serves as documentary evidence of the acquisition price and date.

Disclaimer: Tax laws are subject to change. The information above is for general educational purposes. Investors should consult a qualified chartered accountant or tax advisor for advice specific to their situation.

Example

Key benefits

How it works

1. 1
   Company Decides to Go Public

   The company's board and promoters decide to raise capital through a public issue, engage investment bankers (Book Running Lead Managers), and conduct due diligence to prepare all required documentation.

2. 2
   DRHP Filing and SEBI Review

   The Draft Red Herring Prospectus is filed with SEBI and the stock exchanges. SEBI reviews the document and issues observations; the company addresses queries and receives regulatory clearance to proceed.

3. 3
   Price Band Announced and RHP Filed

   The company finalises the price band in consultation with lead managers, files the Red Herring Prospectus with the Registrar of Companies, and opens the subscription window for investors.

4. 4
   Investor Applications via ASBA/UPI

   Retail investors submit bids through their broker or bank's ASBA portal using their UPI ID; funds are blocked (not debited) in their bank account upon mandate approval.

5. 5
   Book Closes and Final Price Determined

   After the subscription period ends, the registrar tallies all bids; the company and bankers determine the final issue price (usually the cap price for oversubscribed IPOs).

6. 6
   Allotment and Refund Processing

   The registrar conducts allotment (lottery for retail, proportionate for NIIs and QIBs), credits shares to successful applicants' Demat accounts, debits blocked funds, and releases funds for non-allotted applications.

7. 7
   Listing and Secondary Market Trading

   Shares list on NSE and/or BSE on the designated listing date; a pre-open call auction determines the listing price, after which shares trade freely in the secondary market like any other listed stock.

Formula

Minimum Application Amount = Lot Size (shares) × Cap Price (₹)
Subscription Ratio = Total Shares Applied For in a Category ÷ Shares Available in that Category

Key takeaways

Frequently asked questions

Related terms