What Is an IPO and How Does It Work?

What Is an IPO?

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the general public for the first time. Before an IPO, a company is "private"—its shares are owned by founders, early investors, venture capitalists, or private equity firms. After an IPO, the shares are listed on a stock exchange (NSE, BSE), and anyone with a Demat and Trading account can buy and sell them.

Why Do Companies Go Public?

• Raising Capital: The primary reason. The money raised through an IPO can be used for expansion, paying off debt, acquisitions, or working capital.
• Exit for Early Investors: Venture capitalists and early-stage investors can sell their shares to the public, realizing their investment gains (known as an Offer for Sale or OFS).
• Brand Visibility: Being a publicly listed company enhances brand recognition and credibility with customers, partners, and talent.
• Employee Incentives: Listed shares enable stock-based compensation programs (ESOPs) that can attract and retain top talent.

How the IPO Process Works in India

1. Appointment of Merchant Bankers: The company appoints SEBI-registered investment banks (merchant bankers) to manage the IPO process.
2. Filing the DRHP: The company files a Draft Red Herring Prospectus (DRHP) with SEBI, containing all material information about the business—financials, risks, use of proceeds, and management details.
3. SEBI Review: SEBI reviews the DRHP and may raise queries that the company must address before receiving approval.
4. Price Band Announcement: The company announces a price band (e.g., ₹400–₹420 per share) within which investors can bid.
5. Subscription Period: The IPO opens for a specified period (usually 3 business days), during which investors submit their bids through their trading accounts or via the UPI-based ASBA process.
6. Allotment: If the IPO is oversubscribed, shares are allotted via a lottery process for retail investors. Not all applicants may receive shares.
7. Listing Day: Shares are listed on the stock exchange. The opening price is determined by market demand and supply.

Key Takeaways

• An IPO is a company's first sale of shares to the public.
• It provides companies with capital and early investors with an exit.
• Investing in IPOs carries risk; listing gains are never assured.
• Always read the prospectus and understand the business before applying.