Last Updated: 9th Apr, 2026
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Initial Public Offering is a process that allows a private company to raise funds from the public and get listed on the stock exchange. In 2025, until September, India had 56 IPOs raise bout ₹75,384 crore, up from ~₹64,011 crore in the same period in 2024. This article explains what IPO stands for, how does it work, its advantages and disadvantages.
What is IPO?
An Initial Public Offering (IPO) refers to the process by which a private company becomes a listed firm by offering its shares to the public for the first time. It’s a method used by companies to raise capital from investors through the equity markets. Once listed, these shares can be freely traded on stock exchanges.
Types of IPO
There are primarily two types of IPO offerings in the Indian stock market:
1. Fixed Price Issue
In a fixed price issue, the company decides a specific price at which its shares will be offered to the public. This price is announced in advance, and investors must apply at the same value without any variation. For example, if a company fixes the price at ₹120 per share, every applicant will have to pay ₹120 for each share they apply for. Investors know the exact amount they will be investing from the start.
2. Book Building Issue
In this method, the company does not set one fixed price but instead provides a price band (for example, ₹100–₹120). Investors then place their bids within this range, mentioning the number of shares they want and the price they are willing to pay. Based on the total demand and number of bids received, the final price called the cut-off price, is determined. Shares are then allotted to investors at this final price. This method helps the company discover the fair market value of its shares.
IPO Advantages and Disadvantages
IPOs provide several opportunities for companies and investors. However, they come with certain risks as well. Let’s understand the pros and cons.
Advantages | Disadvantages |
Companies can raise significant funds to support expansion, pay off debt, or invest in growth. | Listed companies are subject to SEBI’s ongoing compliance and disclosure requirements. |
A publicly listed company often gains more recognition, trust, and brand value in the market. | Public companies face pressure from shareholders and analysts for consistent performance. |
Promoters, early-stage investors, and employees may sell their holdings post-listing. | The IPO process is time-consuming and involves underwriting, due diligence, and legal compliance. In such scenarios, monetising holdings may take time. |
How an Initial Public Offering (IPO) Works?
The IPO process follows a systematic approach governed by the Securities and Exchange Board of India (SEBI):
- Appointment of a Merchant Banker: The company hires a merchant banker (or investment bank) to guide the IPO process and evaluate readiness for public listing.
- Filing of Draft Red Herring Prospectus (DRHP): A detailed document containing the company’s financials, risks, and fund utilisation plans is prepared and submitted to SEBI.
- SEBI Review and Approval: SEBI examines the DRHP, and once approved, the company is allowed to move ahead with the public issue.
- IPO Opens for Subscription: The IPO is made available to investors for bidding. Applications are submitted through the ASBA (Application Supported by Blocked Amount) facility via banks or broker platforms.
- Share Allotment: After the subscription window closes, shares are allotted to investors based on demand and availability.
- Listing on Stock Exchanges: Finally, the shares are credited to investors’ Demat accounts, and trading begins on exchanges like NSE and BSE.
This method ensures transparency and fair access to all retail and institutional investors.
Why Does a Company Offer an IPO?
Companies offer IPOs for several strategic and financial reasons:
- To Raise Capital: Fresh capital is used to fund operations, repay loans, or invest in infrastructure.
- To Increase Public Profile: Being listed often brings credibility and media attention.
- To Provide an Exit to Existing Shareholders: Founders, venture capitalists, or private equity investors can partially exit.
- To Enable Stock-Based Incentives: Public shares make it easier to grant ESOPs to employees.
How to Invest in an IPO?
To invest in an IPO in India, you can follow these steps:
Step 1: Open a Demat and Trading Account
A valid Demat account is necessary to hold shares electronically.
Step 2: Check Upcoming IPOs
Use platforms like NSE/BSE websites or YES Securities upcoming IPO page to track IPO dates.
Step 3: Study the DRHP
Read the Draft Red Herring Prospectus to understand the company’s financials and risks.
Step 4: Place a Bid Through ASBA
Log in to your net banking or trading app and apply via the ASBA facility.
Step 5: Wait for Allotment Results
Post-closing, allotment is finalised, and shares are credited to your Demat account if successful.
Step 6: Monitor Listing Performance
Once listed, assess how the shares perform against the listing price.
Terms Associated with IPO
Understanding IPO-specific terms is important for first-time investors, here are a few important ones to know about:
- Draft Red Herring Prospectus (DRHP): A document with details about the company, its financials, risks, and how it plans to use the raised funds.
- Lot Size: The minimum number of shares you must apply for in an IPO.
- Listing Price: The price at which the company’s shares start trading on the stock exchange.
- Issue Price: The price at which shares are offered to investors during the IPO.
- Price Band: The range within which investors can bid for shares in a book-building IPO (e.g., ₹100–₹120).
- Cut-off Price: The final price decided in a book-building IPO, based on investor demand.
- Grey Market Premium (GMP): The unofficial price at which IPO shares are traded before their official listing.
- Oversubscription: When the number of bids for shares is more than the total shares available.
- Allotment Date: The date on which shares are allotted to investors who applied.
- Refund/Unblocking Date: The date when funds are refunded or unblocked in case shares are not allotted.
- Listing Date: The day when the shares officially get listed and start trading on the stock exchange.
Once you know what are IPOs and how do they work, understanding these key terms can help you navigate the primary market.
Conclusion
An IPO marks a company’s transition from private to public ownership. Merchant bankers aid companies in issuing fixed price or book building IPOs, following SEBI guidelines. Investors can buy the shares and may gain upon their listing on exchanges, if companies perform well in the future. However, understanding the initial public offering definition, what is IPO in share market and how it works is vital before investing.
