An Initial Public Offering (IPO) is one of the most anticipated events in the stock market when a private company makes the important decision of becoming public and offering a share of its ownership to potential investors. If you have ever thought about the meaning of IPO, why companies implement it and how it benefits ordinary investors like you, this guide is for you.
In this guide, we will explain in layman's terms the IPO meaning, types of IPO, IPO process, IPO eligibility and IPO advantages.
What Is IPO?
Before we proceed, it is important to understand the meaning of an IPO. IPO Meaning - An IPO (Initial Public Offering) is the process by which a private company offers its shares to the public for the very first time and gets listed on a stock exchange.
In an IPO, a company fundamentally changes by making it available for public ownership. Before an IPO, the ownership of the company is solely in the hands of the founders and a small number of private investors. After the IPO, ownership of the company is available to the general public and any retail investor is free to purchase shares of the company.
In India, the process of IPO is monitored by the Securities and Exchange Board of India (SEBI), while shares are listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
In simple words:
IPO = Company + Public Money + Stock Market Listing
Why Do Companies Launch an IPO?
Companies don’t go public randomly. An IPO is usually launched to achieve one or more of the following goals:
- Raise capital for expansion, technology, or new projects.
- Reduce debt and strengthen the balance sheet.
- Provide exit to early investors and venture capitalists.
- Increase brand credibility and public visibility.
- Create liquidity for existing shareholders.
- Once listed, a company can also raise funds more easily in the future via follow-on offerings.
Types of IPO
Understanding the types of IPO helps investors evaluate how shares are being offered and priced.
1. Book Building IPO
- This is the most common type of IPO in India.
- A price band (e.g., ₹90 - ₹100) is announced.
- Investors bid within this range.
- The final price is discovered based on demand.
- Advantage: Market-driven pricing and better transparency.
2. Fixed Price IPO
- Here, the company sets a fixed price for shares.
- Investors know the exact price in advance.
- No bidding range.
- Limitation: Less flexibility and weaker price discovery.
3. New share IPO
In a new share IPO:
- The company makes and sells new shares.
- The money raised goes directly to the company.
- Used almost exclusively for company growth, expansion, and paying off company debt.
4. Offer for Sale (OFS)
In an OFS:
- Stakeholders sell their shares.
- The company does not receive funds.
- Most OFS are used by company promoters and private equity contracts for a small exit.
IPO Eligibility: Who Can Invest in an IPO?
IPO eligibility in India is quite simple and very inclusive.
Retail Investors must have:
- A PAN card.
- A Demat account.
- A Bank account (ASBA-enabled).
Importantly, there is no minimum income limit to apply for an IPO.
Types of Investors in an IPO
There are 3 levels of investors in an IPO:
Retail Individual Investors (RII) - Small stakeholder investors.
Non-Institutional Investors (NII/HNI) - Large high-net-worth individuals.
Qualified Institutional Buyers (QIB) - Investment banks, mutual funds, foreign institutional investors.
Each type of investor has a separate allocation in the IPO allotment.
IPO Process: Step by Step
IPO processes are built around a loose framework of regulatory structure.
Step 1: The Appointment of Investment Bankers
The company employs merchant bankers/underwriters to facilitate and structure the IPO.
Step 2: Draft Red Herring Prospectus (DRHP)
The DRHP must be submitted to SEBI and must contain:
- Business model
- Financials
- Risk factors
- Intended use of the funds from the IPO.
Step 3: SEBI Approval
SEBI reviews the documents and makes sure that there is:
- Transparency.
- Protection of the investors.
- Compliance with the applicable regulations.
Step 4: Price Band & IPO Opening
The company publishes:
- IPO opening and closing dates.
- Price range.
- Lot size.
- Investors can apply for shares via ASBA.
Step 5: IPO Allotment
When the IPO subscription is closed:
- Retail segment shares are allocated either via a proportionate or a lottery system.
- Unutilised funds are returned to the investors.
Step 6: Listing on Stock Exchange
The company’s shares are listed on the respective stock exchange (NSE/BSE) and are offered for trading on the secondary market.
Reasons IPOs Attract Investors
1. Early Investment Opportunities
With an IPO, investors are granted the opportunity to invest in the company when it goes public for the first time, possibly right before it achieves further growth.
2. Potential for Listing Gains
On the first day of trading, most IPOs are offered at a substantial premium, providing investors the opportunity to earn short-term profit.
3. Development of Wealth Over Time
Investors in successful companies can potentially earn multibagger returns long after the IPO.
4. Portfolio Diversification
Investing in IPOs enables investors to diversify across:
- Sectors.
- Market caps.
- Business models.
5. Transparency and Regulation
Listed companies must adhere to:
- Quarterly disclosures.
- Corporate governance.
- SEBI regulations.
This increases information availability.
Risks of IPO Investment
While the IPO advantages are many, the potential risks should also be acknowledged:
- Overvaluation.
- Subscriptions based on hype.
- Lack of historical data.
- Volatility of an IPO after it lists.
Investors should focus on the fundamentals, not the grey market.
IPO vs. Secondary Market: Key Difference
|
Aspect |
IPO |
Secondary Market |
|
Stage |
First public issue |
After listing |
|
Price |
Fixed or band |
Market-driven |
|
Risk |
Higher uncertainty |
Comparatively lower |
|
Data availability |
Limited |
Extensive |
What to Analyse Before Investing in an IPO
- Revenue and profit growth.
- Level of debt.
- The credibility of the promoters.
- Future of the industry.
- Valuation of the firm in comparison to its peers.
- Expected use of the IPO funds.
- Analyse the DRHP.
Final Thoughts: Should You Invest in an IPO?
Knowing what an IPO is, the types and steps in the IPO process, eligibility, benefits and drawbacks helps you understand how to invest in an IPO successfully. There are possible rewards, but they require the right amount of research, discipline, and anticipation for the correct outcome.
The long-term wealth creator is the quality of the business, not the listing day circus.
