An IPO (Initial Public Offering) is when a company sells its shares to the public for the first time and lists them on a stock exchange. After the IPO, anyone can buy and sell the company's shares on the market.
What an IPO is
Before an IPO, a company is owned by its founders, employees and private investors. Through an IPO, it can raise new money for growth, repay debt or allow early investors to sell part of their holdings. An IPO can include a fresh issue (new shares, money goes to the company) and an offer for sale (existing shareholders sell, money goes to them), or both.
How it works in India
The company appoints merchant bankers and files a Draft Red Herring Prospectus (DRHP) with SEBI, describing its business, finances, risks and plans. After SEBI's observations, it files a Red Herring Prospectus and announces a price band. Most IPOs use book building: investors bid within the band over a few days, and the final price is set based on demand.
Shares are reserved for different investor groups, including a portion for retail investors. You apply through your bank or broker using ASBA or UPI, which blocks money in your account until allotment. Shares are applied for in fixed lots. If an IPO is oversubscribed, allotment is done by lottery among retail applicants. Listing now happens quickly, within a few working days of the issue closing. Smaller companies can list on separate SME platforms with different rules.
A simple example
A company announces a price band of ₹200 to ₹210 with a lot of 70 shares. You bid for one lot at ₹210, and ₹14,700 is blocked in your bank account. The issue is heavily oversubscribed; you are lucky in the lottery and receive one lot. The blocked amount is debited, the shares are credited to your demat account, and they begin trading on listing day.
Why it matters for investors
IPOs offer a chance to invest in companies early in their public life. They also require care: newly listed companies have no trading history, and IPO pricing is set by the company and its bankers, who want a good price for the sellers.
How investors evaluate an IPO
Investors who study an IPO usually read the prospectus, especially the business model, financial history, risk factors, how the money will be used and whether existing investors are selling. They compare the valuation with listed companies in the same industry. Media hype and unofficial "grey market" prices are not reliable guides to a company's value.
Lock-in for promoters and anchor investors
To protect new investors, rules require promoters to keep a minimum part of their holding for a set period after listing, and anchor investors, large institutions that buy shares just before the IPO opens, also face a lock-in. When these lock-in periods end, more shares can become available for sale, which some investors watch closely.
Common misconceptions
"IPOs always list at a profit." Many do, but many list below the issue price.
"Oversubscription means it is a good company." It shows demand, not quality.
"Applying for more lots improves my chances." For retail investors, allotment is generally by lottery per application.
Frequently asked questions
What is a price band?
The range within which investors can bid in a book-built IPO.
What is ASBA?
Application Supported by Blocked Amount: money stays in your account, only blocked, until allotment.
What if I don't get shares?
The blocked amount is released.
What is an SME IPO?
An IPO for smaller companies on separate exchange platforms, usually with larger minimum investments.
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Summary
An IPO is a company's first sale of shares to the public, followed by listing on an exchange. In India, it involves a SEBI-reviewed prospectus, a price band, book building, ASBA/UPI applications, lottery-based retail allotment and quick listing. Listing gains are not guaranteed, which is why the prospectus and the valuation matter.