What is an IPO? Complete Step-by-Step Guide to Initial Public Offering in India
If you’re new to the stock market, you’ve probably heard people say, “I’m applying for this IPO.” But what exactly is an IPO, how does it work, and how can you invest in it confidently?
In this detailed and beginner-friendly guide, we’ll understand everything about IPO (Initial Public Offering) — what it is, why companies launch it, what the requirements are, and the entire IPO process in India — from book building and underwriting to allotment and listing.
So let’s start!
What is an IPO?
IPO stands for Initial Public Offering.
Whenever a company wants to raise money from the public for the first time, it lists its shares on the stock exchange (like NSE or BSE).
When a company goes public for the first time and allows ordinary people (like you and me) to buy its shares — that process is called an IPO.
After the IPO, the company’s shares start trading publicly on the stock exchange.
Why Does a Company Need an IPO?
There are three main reasons why companies launch an IPO:
- To Raise Funds for Expansion
When companies want to grow — open new branches, expand operations, or enter new markets — they need large amounts of capital.
IPO helps them raise this money from the public. - To Pay Off Debts or Liabilities
Some companies use IPO funds to repay old loans or clear existing liabilities. - To Give an Exit to Early Investors
Angel investors, venture capitalists, or private equity firms who invested early in the company might want to “exit” and book profits.
IPO gives them liquidity — as the shares get listed, they can sell them in the market.
The Four Stages of a Company’s Funding Journey
- Stage 1: Promoter and friends/family funding
- Stage 2: Angel investors
- Stage 3: Venture capital or private equity firms
- Stage 4: IPO – Initial Public Offering, where the company raises funds from the general public
The IPO Process (Step-by-Step)
Let’s understand how an IPO is launched — from planning to listing.
1. Appointment of Investment Bank (Merchant Bank)
The company hires an investment bank or merchant bank to manage its IPO.
Examples of such banks include ICICI Securities, Axis Capital, HDFC Bank, SBI Capital, etc.
The company checks:
- The bank’s reputation and track record in bringing IPOs
- How they handle pricing and valuation
- Their research quality
- Their distribution network (how many investors they can reach)
The investment bank becomes the main advisor and manager of the entire IPO process.
2. Due Diligence, Legal Procedure & Underwriting
Once the bank is appointed, they start the due diligence — verifying every detail of the company’s financials, legal compliance, and business health.
Then comes underwriting, which means the investment bank guarantees that the IPO will raise the required amount.
There are 3 types of underwriting agreements:
- Firm Commitment – The investment bank guarantees to raise the full amount. If there’s any shortfall, they will buy the remaining shares themselves.
- Best Effort Commitment – The bank will try its best to sell the shares but gives no guarantee of full subscription.
- Syndicate Underwriting – For large IPOs, multiple banks form a syndicate to share the work and risk. One becomes the lead manager (book runner), and others are co-managers.
3. Drafting the Red Herring Prospectus (RHP)
The Red Herring Prospectus is a detailed document prepared by the investment bank.
It contains all important information about the company, including:
- Promoters and management details
- Business model and competitive strengths
- Financial statements and growth data
- Future plans and risks
It’s meant to provide complete transparency to investors before they decide to invest.
4. Compliance and SEBI Filings
After preparing the RHP, the company submits it to SEBI (Securities and Exchange Board of India) and the stock exchanges (NSE/BSE).
SEBI ensures that all legal and listing requirements are met — under:
- The Companies Act
- Securities Contract Act
- Listing Regulations
Only after SEBI’s approval can the company go ahead with the IPO.
5. Pricing the Issue
The investment bank and company together decide the valuation of the company and the issue price.
Suppose:
- Company’s valuation = ₹10,000 crore
- It wants to sell 20% to the public → ₹2,000 crore IPO
If each share is priced at ₹200, then the company will issue 10 crore shares.
To make investing easy, IPOs are offered in lots.
Example:
- 1 lot = 50 shares
- Price per share = ₹200
- Minimum investment = ₹10,000 (50 × 200)
6. Fixed Price Issue vs Book Building Issue
- Fixed Price Issue
- The price of the share is fixed (say ₹200).
- Investors know exactly how much they’ll pay.
- Book Building Issue (most common today)
- A price band is announced — e.g., ₹180–₹200.
- Investors place bids within this range.
- The final issue price is decided after seeing demand.
- The lower limit = Floor Price
- The upper limit = Cap Price
- The difference between both can’t exceed 20%.
This method helps discover the right market-driven price for the IPO.
7. Marketing and Distribution
Now comes the time to market the IPO.
The investment bank and company organize roadshows, presentations, and investor meets to promote the issue among:
- QIBs (Qualified Institutional Buyers) – Mutual funds, pension funds, insurance companies
- Non-Institutional Investors (NII) – High net-worth individuals (HNIs)
- Retail Investors – Small individual investors like us
8. Application Process
Once the IPO is open, investors can apply via:
- Their Demat account through the stockbroker
- UPI apps (like BHIM, Paytm, PhonePe)
- ASBA (Applications Supported by Blocked Amount), where your money is blocked in your bank account until shares are allotted
The IPO remains open for 3–5 days for bidding.
9. Oversubscription and Allotment
If the IPO gets oversubscribed (more applications than available shares), not everyone gets allotment.
Example:
- Company wants to issue 10 crore shares
- Investors apply for 20 crore shares
Allotment then happens based on SEBI’s category-wise quota:
- QIBs: 50%
- Non-Institutional Investors: 15%
- Retail Investors: 35%
If oversubscribed, allotment is done through a lottery system for retail investors
10. Listing on Stock Exchange
After allotment, the shares get listed on the stock exchanges (BSE/NSE).
Earlier, it used to take 6 days for listing after closing.
Now, SEBI has reduced it to just 3 days — making the process faster and more transparent.
Benefits of Faster Listing and Early Access
- Quick Access to Capital for Companies – They get funds faster to use for business growth.
- Faster Liquidity for Investors – Shares get listed quickly, allowing investors to sell or buy immediately.
- Less Waiting Time – Refunds and allotment happen within 3 days, improving efficiency.
Summary
| Step | Process | Managed By |
|---|---|---|
| 1 | Appointment of Investment Bank | Company |
| 2 | Due Diligence & Underwriting | Investment Bank |
| 3 | Red Herring Prospectus | Investment Bank |
| 4 | SEBI Filings & Compliance | Company & Bank |
| 5 | Pricing & Valuation | Merchant Bank |
| 6 | Marketing & Distribution | Bank & Company |
| 7 | Application & Bidding | Investors |
| 8 | Allotment & Refund | Registrar |
| 9 | Listing | Stock Exchange |
Final Thoughts
IPO is one of the most exciting opportunities for both companies and investors.
For companies, it’s a gateway to growth and public trust.
For investors, it’s a chance to become early shareholders of growing brands.
But before investing, always read the Red Herring Prospectus, check the company fundamentals, and understand the issue pricing.
An IPO can be profitable — but only when you invest wisely!