What is an IPO?

The idea

An initial public offering, or IPO, is the first time a company sells its shares to the public. After the IPO the shares are listed on a stock exchange such as NSE or BSE, and anyone with a demat account can buy or sell them there.

A company may raise new money for itself (a fresh issue), or existing shareholders such as founders or early investors may sell some of their shares (an offer for sale). Many IPOs are a mix of both. Money from a fresh issue goes to the company; money from an offer for sale goes to the selling shareholders.

The offer document

Before an IPO, the company files a draft offer document with SEBI, called the draft red herring prospectus (DRHP). Once SEBI has reviewed it, the company files the red herring prospectus (RHP) shortly before the issue opens. The RHP sets out the business, the risks, the financial statements, how the money will be used, any legal cases, and who is selling.

The RHP is the main source of facts about an IPO. Reading at least the risk factors, the objects of the issue and the financial statements gives a clearer picture than any summary.

Price band and lot size

Most IPOs in India are book-built. The company sets a price band, for example ₹100 to ₹105, and investors bid within it. The final issue price is fixed after bidding closes, based on the bids received.

Shares are applied for in lots. A lot is the smallest number of shares that can be bid for, and every bid is a whole number of lots. Individual investors can usually bid at the "cut-off", which means accepting whatever final price is set within the band.

Investor groups

An IPO is split into portions for different kinds of investors: retail individuals, non-institutional investors (NII), qualified institutional buyers (QIB) such as mutual funds and insurers, and sometimes employees or shareholders of a parent company. The share kept for each group is set by SEBI’s rules and printed in the RHP. The IPO allotment page explains these groups in more detail.

From bidding to listing

• Anchor investors: large institutions may be allotted shares one working day before the issue opens. Their names and the price they paid are published.
• Bidding: the issue stays open for at least three working days. Individuals apply through their bank (ASBA) or with a UPI mandate through a broker app, and the money stays in their account, blocked, until allotment.
• Subscription: the exchanges publish how many times each group’s portion has been bid for. "Oversubscribed 10 times" means bids were for ten times the shares on offer in that group.
• Allotment: the registrar works out who gets shares. Unsuccessful applicants have their blocked money released.
• Listing: under SEBI’s T+3 timeline, shares are listed three working days after the issue closes (T being the closing day).

Things to keep in mind

The listing price can be above or below the issue price, and past listing gains say nothing about future issues. The "grey market premium" quoted in the media is unofficial and unregulated, and it is not published by SEBI or the exchanges.