What Is an IPO?

Every company trading on the NSE or the BSE today was once private. Its shares sat with a founder, a family, a handful of employees and perhaps a private equity fund, and they could change hands only through a negotiated deal signed in a room. An initial public offering is the event that ends that arrangement. Shares are offered to the general public under a regulated process, money moves from thousands of applicants into either the company or its selling shareholders, and from listing day onwards the price of those shares is set continuously by an open market instead of by private agreement.

What actually changes when a company lists

Three things change at once, and it helps to keep them separate. Ownership becomes dispersed, because shares now sit in the demat accounts of retail applicants, mutual funds, insurers and foreign institutions rather than with a closed group. Pricing becomes public, because a live market quotes a value for the business every trading second, whether or not the promoter agrees with it. And disclosure becomes mandatory and continuous: quarterly results, shareholding patterns, related-party transactions, board changes and material events all have to be filed with the exchanges on defined timelines.

One thing does not automatically change: the total number of shares in existence. An IPO can create new shares, or it can simply move existing shares from one set of owners to another, or it can do both in the same offer. That distinction decides whether the money raised reaches the company's bank account or the sellers' bank accounts, and it is the single most useful thing a beginner can learn to read off an offer document. The companion article on fresh issue versus offer for sale in this pack works through that split in detail.

Who has to sign off, and what that signature means

India runs a disclosure-based regime, not a merit-based one. The Securities and Exchange Board of India reviews the offer document to test whether the company has disclosed enough for an investor to make an informed decision, and it issues observations that the company must address. SEBI does not certify that the business is sound, that the accounts are flattering for good reason, or that the asking price is reasonable. Every offer document carries a statement to that effect, and it is not boilerplate to be skipped.

The stock exchanges grant in-principle approval to list, which confirms the company meets their listing eligibility norms. The Registrar of Companies receives the final prospectus. Merchant bankers, called lead managers in an offer, carry statutory due-diligence responsibility for the disclosures. Understanding that these are four different gatekeepers with four different jobs stops a reader from treating any one of them as a quality guarantee.

Stage one: the company reshapes itself for public life

Long before any dates are announced, the company converts into a public limited company, restates several years of financial statements to the format regulators require, and rebuilds its board with independent directors and the statutory committees. It appoints lead managers to structure and market the issue, a registrar to handle applications and allotment, legal counsel to draft disclosures, and auditors to certify the restated accounts. Promoters must commit a minimum shareholding that stays locked in after listing, so that the people who ran the company privately retain skin in the game.

Stage two: the draft document and SEBI's observations

The company files a draft red herring prospectus with SEBI and the exchanges. It is published for public comment, which is the only stage where an ordinary reader can flag something to the regulator. The draft carries the business description, restated financials, risk factors, promoter and group-company details, litigation, related-party transactions, and the intended uses of the money. What it deliberately omits is price, dates and lot size, because those are decided much later. Separate articles in this pack cover the DRHP and the risk-factor section on their own.

SEBI's observations are not a rubber stamp. They frequently require the company to expand a disclosure, restate a claim, explain a transaction or add a risk factor. Once observations are addressed, the company gets a limited window to actually launch the issue, after which the clearance lapses and the process has to be refreshed. The length of that window is set by regulation and has been revised over time, so check the current position with SEBI rather than relying on a figure quoted in an old article.

Stage three: the red herring prospectus sets the terms

The updated document filed closer to launch is the red herring prospectus. This is the version that carries the price band, the lot size, the opening and closing dates, the category-wise reservation and the final issue structure. The odd name comes from the fact that the exact issue price is still absent; it emerges only after bidding closes. A minority of issues, particularly smaller ones, use a fixed-price format instead, where a single price is stated upfront and there is no band to bid within.

Stage four: anchors first, then the public book

Large institutional investors are usually allotted shares one working day before the public window opens, through an anchor allocation at a price fixed in advance. The purpose is practical: it demonstrates that professional investors have committed capital at a stated price, and it reduces the risk of the issue failing for want of demand. Anchor shares carry a lock-in that releases in tranches after listing, which is why the anchor list and its lock-in schedule are worth reading rather than skimming.

The public bidding window then opens for a small number of working days stated in the prospectus. Applicants place bids at any price within the band, or at cut-off, which means agreeing in advance to whatever final price is discovered. Because every bid carries both a price and a quantity, the book gradually forms a demand curve: the merchant bankers can see how many shares are sought at each rupee level. The final issue price is set where the book clears with the quality of demand the company and its bankers want, which is why a heavily bid issue is normally priced at or near the upper end of the band.

Stage five: the three categories and the subscription figures

Applications are pooled into qualified institutional buyers, non-institutional investors and retail individual investors, and each category has a reserved proportion of the issue set by regulation. Those proportions differ depending on whether the company satisfies certain profitability and track-record conditions, so the split is printed in the prospectus rather than being one universal number. Employees and existing shareholders of a listed parent sometimes get their own reserved portions too.

During the window, the exchanges publish subscription data several times a day. A category shown at four times subscribed has received bids for four times the shares reserved for it. The numbers are informative but they are also a live snapshot of an incomplete process.

• Demand is not evenly spread across the window; institutional bids cluster heavily on the final day, so an early reading understates the eventual total.
• Category subscription is measured against that category's reserved shares, not against the whole issue, so the headline overall figure and the retail figure answer different questions.
• Bids can be revised or withdrawn within the rules that apply to each category, so an intermediate figure is not final.
• High subscription tells you how many people applied at that price; it does not tell you whether the price was sensible.
• Unsubscribed portions in one category can, within limits set by regulation, be reallocated to another, which changes the effective odds of allotment.

Stage six: allotment, unblocking and refunds

After the window closes, the registrar prepares the basis of allotment in consultation with the exchange. Where the retail category is oversubscribed, allotment moves to a computerised lottery in which every valid application is treated as a single entry for the minimum lot, so applying for ten lots does not multiply your chance of receiving one lot. Where a category is undersubscribed, applicants generally receive what they bid for. The larger categories are allotted proportionately rather than by draw.

Because Indian applications block money rather than debit it, an unsuccessful applicant does not wait for a cheque. The blocked amount in the bank account is simply released, and a partly successful applicant has only the allotted value debited with the balance unblocked. The mechanics of blocking, of the UPI mandate and of what to do when unblocking is delayed are covered by dedicated articles in this pack.

Stage seven: listing day

Allotted shares are credited to demat accounts, and on the listing date the exchange runs a special pre-open session for the new scrip. Orders collected in that session are matched to determine a single equilibrium opening price, after which the share trades continuously like any other listed security. The gap between issue close and listing is fixed by regulation and has been compressed over the years, so treat the exact number of days as something to confirm on the exchange website for the specific issue you are tracking.

The opening price and the issue price are set by two different mechanisms. The issue price came from a book of applications submitted over a few days under fixed rules. The opening price comes from whoever wants to buy or sell that morning, including allottees who applied only to sell immediately. The two can differ in either direction and by a wide margin. Nothing in the IPO process assures a listing gain, and any content that suggests otherwise is describing a hope, not a mechanism.

An illustrative walk-through of the numbers

The figures that follow are invented purely to show the arithmetic. Suppose Company A, a manufacturing business, announces a price band of ₹180 to ₹190 per share with a lot of 78 shares. A retail applicant bidding for one lot at cut-off has ₹14,820 blocked, because 78 multiplied by the ₹190 ceiling is the maximum that could be owed. If the discovered issue price turns out to be ₹190, the full amount is debited on allotment. If it is discovered at ₹184, only ₹14,352 is debited and ₹468 is released.

Now scale it up. If the same company offers 2 crore shares and the issue price settles at ₹190, the issue size is ₹380 crore. Suppose the prospectus says 1.2 crore shares are freshly issued and 80 lakh shares are being sold by an existing investor. Then ₹228 crore reaches the company for the uses listed in the document, and ₹152 crore reaches the selling shareholder. The company's share count rises by 1.2 crore shares; the 80 lakh sold shares simply change owner. Again, these are illustrative numbers, not market data.

Where the money goes and who watches it

The prospectus contains a section titled objects of the issue that lists exactly what the fresh-issue proceeds will fund: a new plant, repayment of specified borrowings, working capital, technology spending, or general corporate purposes within a permitted cap. For issues above a size threshold, a monitoring agency must track the actual deployment against those stated objects and report periodically, and those reports are filed with the exchanges after listing. Reading them a year later is one of the more honest ways to judge whether a company did what it said it would do.

Mainboard and SME are two different doors

India runs a main board for larger companies and separate SME platforms for smaller ones. The SME route has lighter eligibility thresholds but much larger minimum application sizes, thinner trading volumes after listing, and different migration rules for moving to the main board later. The two are not interchangeable, and an application process that feels familiar can carry a very different risk and liquidity profile. The dedicated mainboard versus SME article in this pack lays out the differences.

Four things an IPO is not

• It is not a discount. The price band is set by the company and its bankers with a view to the market, not as a concession to early applicants.
• It is not regulatory endorsement. Clearance means the disclosures were adequate, not that the business or the valuation was assessed and approved.
• It is not a short-term product by design. The application process happens to be short; the ownership stake you receive is in an operating business.
• It is not the same as buying a listed share. There is no live price to react to, you commit money before knowing the final price, and you may receive nothing at all.

How to read an offer before forming any view

1. Open the prospectus itself from the SEBI, exchange or lead-manager website rather than relying on a summary card.
2. Find the fresh issue and offer-for-sale split, and note who is selling and how much of their holding they are keeping.
3. Read the objects of the issue and check whether the stated uses are specific or largely general corporate purposes.
4. Read the risk factors in full, including the litigation, contingent liability and related-party sections that summaries usually drop.
5. Look at revenue, margin and cash-flow trends across the restated years, not just the most recent one.
6. Compare the implied valuation with the peer set the company itself names, and ask why any premium is deserved.
7. Check post-listing supply: how many shares come out of lock-in, when, and at whose discretion.
8. Decide the maximum you can afford to lose entirely before you decide how many lots to apply for.

An IPO is best understood as a transfer of a business from a small, informed group of owners to a large, less informed one, conducted under rules designed to narrow that information gap. The rules do a reasonable job of forcing disclosure. They do nothing at all about price. That remaining gap is where the investor's own work begins, and it is the reason the rest of this pack breaks the process into pieces you can examine one at a time.