What is an IPO and How Does it Work? A Complete Guide for Indian Investors
By IPO Plus
What is an IPO and how does it work? Discover the meaning, process, application steps, allotment rules, and listing details for Indian mainboard and SME IPOs.
What is an IPO and How Does it Work? A Complete Guide for Indian Investors
Key Takeaways
- An IPO lets a private company raise capital by selling shares to the public for the first time and getting listed on the NSE or BSE.
- SEBI regulates every IPO in India, while merchant bankers manage pricing, documentation, and marketing through the DRHP and RHP stages.
- Retail investors apply online via UPI or ASBA, with a minimum investment usually between ₹10,000-₹15,000 for mainboard IPOs and higher for SME IPOs.
- Oversubscribed retail categories are allotted shares by lottery, and most mainboard IPOs now list within three working days (T+3) of closing.
- Grey market premium and live subscription data are useful indicators, but every investor should assess company fundamentals before applying.
What is an IPO?
What Does IPO Stand For?
What is an IPO and how does it work? An IPO, or Initial Public Offering, is the process through which a private company sells shares to the public for the first time and gets listed on a stock exchange such as the NSE or BSE. Once listed, the company's shares can be freely bought and sold by retail and institutional investors on the secondary market.
IPO stands for Initial Public Offering. Before an IPO, a company is privately held by its founders, promoters, and early investors such as venture capital or private equity firms. An IPO converts this private ownership into public ownership by issuing new shares (a fresh issue) or by allowing existing shareholders to sell their stake (an offer for sale, or OFS), or a combination of both.
Why Do Companies Launch an IPO?
Companies launch an IPO primarily to raise capital for growth, such as expanding operations, repaying debt, funding acquisitions, or investing in new projects. An IPO also gives early investors and promoters a way to monetise their holdings, improves the company's public visibility and credibility, and creates a liquid market for its shares that can be used for future fundraising or employee stock options.
Mainboard IPOs and SME IPOs differ mainly in company size, listing platform, and investment ticket size. Mainboard IPOs are launched by larger, established companies and are listed on the main platforms of the NSE and BSE, with a minimum lot size typically ranging from ₹10,000 to ₹15,000 for retail investors. SME IPOs are floated by smaller companies and are listed on the NSE Emerge or BSE SME platforms, usually requiring a higher minimum investment, often above ₹1 lakh per lot, and carrying different disclosure and compliance norms set by SEBI.
Mainboard vs SME IPO: What is the Difference?
How Does the IPO Process Work in India?
How Does a Company Decide Its IPO Price Band?
Understanding what is an IPO and how does it work in practice requires looking at the sequence of regulatory and market steps a company follows before its shares are listed. The process moves from filing draft documents with the regulator to fixing a price band, collecting bids from investors, and finally listing on the exchange.
A company decides its IPO price band with the help of its merchant bankers, based on factors such as the company's financial performance, growth prospects, industry comparables, and prevailing market sentiment. The price band is usually a range with a lower and upper limit, called the floor price and cap price, and investors bid within this range during the book-building process rather than at one fixed price.
What is the Role of SEBI and Merchant Bankers?
SEBI, the Securities and Exchange Board of India, is the primary regulator overseeing every IPO to protect investor interests and ensure full disclosure. Merchant bankers, also called lead managers, are SEBI-registered intermediaries who help the company prepare offer documents, market the issue, decide the price band, and manage the entire fundraising process alongside registrars and legal advisors.
The DRHP, or Draft Red Herring Prospectus, is the first detailed document a company files with SEBI, containing information on its business, financials, promoters, and risk factors, but without the final price or issue size. After SEBI's review and any public feedback, the company files the RHP, or Red Herring Prospectus, which includes the price band and is used to market the issue to investors just before the IPO opens for subscription.
What Happens During the DRHP and RHP Stages?
How Do You Apply for an IPO?
How to Apply for an IPO Online Through UPI or ASBA?
Investors apply for an IPO online through their bank or broker using either the UPI mandate system or ASBA, both of which block the application amount in the investor's own bank account until allotment is finalised. This ensures the money stays in the investor's account and continues to earn interest until shares are allotted or the application is rejected.
To apply, an investor logs into their broker's app or net banking portal, selects the IPO, enters the number of lots and bid price, and authorises a UPI mandate request that is then approved through their UPI app. ASBA, or Application Supported by Blocked Amount, works similarly through net banking and is mandatory for all IPO applications in India, whether submitted through a broker, bank, or the exchange's own app.
What is the Minimum Investment Required for an IPO?
The minimum investment required for an IPO depends on the lot size and price band set by the company, and retail investors must apply for at least one lot. For most mainboard IPOs, this typically works out to an investment between ₹10,000 and ₹15,000, while SME IPOs often require a significantly higher minimum investment, sometimes exceeding ₹1 lakh, because of their larger lot sizes.
Retail Individual Investors, or RIIs, can invest up to ₹2 lakh in an IPO and are allotted a reserved portion of the issue, often decided by lottery if the retail category is oversubscribed. Non-Institutional Investors, commonly called HNIs, invest more than ₹2 lakh and are allotted shares proportionately, while Qualified Institutional Buyers, or QIBs, such as mutual funds and insurance companies, bid for the portion reserved for large institutional investors and typically anchor the issue's pricing and credibility.
Should You Apply as a Retail, HNI, or QIB Investor?
How Does IPO Allotment and Listing Work?
How is IPO Allotment Decided in Case of Oversubscription?
IPO allotment in case of oversubscription is decided through a computerised lottery system for retail investors and proportionate allotment for HNI and QIB categories. If the retail portion of an IPO is oversubscribed, the registrar uses a random, SEBI-approved lottery process to ensure each eligible applicant has a fair and equal chance of receiving at least one lot, regardless of application size within the retail limit.
How to Check Your IPO Allotment Status?
Investors can check their IPO allotment status on the registrar's official website, such as Link Intime or KFin Technologies, or on the NSE and BSE websites, usually a day or two before listing. IPO Plus also tracks live subscription numbers and allotment updates for both mainboard and SME issues, helping investors stay informed without visiting multiple registrar portals separately.
What Happens on IPO Listing Day?
On IPO listing day, the company's shares begin trading on the stock exchange at a price discovered through the pre-open call auction session, which may be higher, lower, or equal to the issue price. Following SEBI's shortened listing timeline, most mainboard IPOs now list within three working days (T+3) of the issue closing, giving investors quicker access to their allotted shares and any listing-day gains or losses.
What Should You Know Before Investing in an IPO?
What is Grey Market Premium (GMP) and How Does it Help?
Grey Market Premium, or GMP, is the unofficial premium at which IPO shares are traded before their official listing, reflecting informal market sentiment about likely listing gains. While GMP is not a SEBI-regulated or guaranteed indicator, many investors use it alongside subscription data on platforms like IPO Plus as one of several signals to gauge overall demand for an upcoming issue.
How to Track Live IPO Subscription Numbers?
Live IPO subscription numbers show how many times an issue has been subscribed across the retail, HNI, and QIB categories on any given day of the bidding period, and can be tracked in real time on the NSE and BSE websites or on dedicated tracking platforms such as IPO Plus. Rising subscription numbers, especially in the QIB category on the final day, often signal strong institutional confidence in the issue.
Is Investing in an IPO Risky for Beginners?
Investing in an IPO carries real risk for beginners because share prices can fall below the issue price on listing day or in subsequent months, and past listing gains do not guarantee future performance. Before committing funds, new investors should read the RHP for risk factors, avoid relying solely on grey market premium or hype, and consider each company's financials and broker reviews rather than treating an IPO as a guaranteed short-term profit opportunity. Grasping what is an IPO and how does it work, from pricing to listing, is the foundation every investor needs before placing their first application.
Frequently Asked Questions
What is an IPO and how does it work in simple terms?
An IPO is the process by which a private company sells shares to the public for the first time and lists them on a stock exchange like the NSE or BSE, allowing anyone to buy and sell those shares afterward.
What is the difference between a mainboard IPO and an SME IPO?
Mainboard IPOs are launched by larger companies and listed on the main NSE/BSE platforms, while SME IPOs are floated by smaller companies, listed on NSE Emerge or BSE SME, and usually require a higher minimum investment per lot.
How can I apply for an IPO online?
You can apply for an IPO online through your broker's app or net banking portal using UPI or ASBA, which blocks the required funds in your own bank account until allotment is finalised.
What is the minimum amount needed to invest in an IPO?
The minimum investment depends on the lot size and price band, but for most mainboard IPOs it typically ranges between ₹10,000 and ₹15,000, while SME IPOs often require significantly more.
How is IPO allotment decided if the issue is oversubscribed?
For oversubscribed retail applications, allotment is decided through a SEBI-approved computerised lottery, while HNI and QIB categories receive shares on a proportionate basis.
What is grey market premium and is it reliable?
Grey market premium is the unofficial price at which IPO shares trade before listing, indicating informal demand, but it is unregulated by SEBI and should only be used as one of several factors, not a guarantee of listing gains.
When do IPO shares get listed on the stock exchange?
Most mainboard IPO shares in India now list within three working days (T+3) of the subscription period closing, after which they begin trading on the NSE and BSE.