An IPO (Initial Public Offering) is the process through which a private company offers its shares to the public for the first time on a stock exchange. When a company “goes public” through an IPO, it sells ownership stakes to retail and institutional investors, raising capital while giving the public an opportunity to invest in the company. In India, IPOs are regulated by SEBI and listed on NSE and BSE.
How an IPO Works
The IPO process begins when a company decides it needs capital for expansion, debt reduction, or to provide an exit to early investors. The company appoints investment banks as “book running lead managers” (BRLMs) who help determine the offer price, prepare the prospectus (DRHP — Draft Red Herring Prospectus), and market the IPO. SEBI reviews the DRHP and provides observations before the IPO can open.
Indian IPOs typically use the book-building process, where a price band is set (for example, ₹700-750 per share). Investors bid within this range during the 3-5 day subscription period. Based on demand, the final issue price is determined. If the IPO is oversubscribed (demand exceeds supply), shares are allotted through a lottery system for retail investors. After allotment, shares are listed on the exchange, and you can see them in your demat account.
Types of IPO Investors
SEBI divides IPO investors into three categories. Retail Individual Investors (RII) can apply for up to ₹2 lakh worth of shares — 35% of the IPO is reserved for this category. Non-Institutional Investors (NII/HNI) apply for more than ₹2 lakh — 15% reservation. Qualified Institutional Buyers (QIB) include mutual funds, insurance companies, and FIIs — 50% reservation. As a retail investor, you compete only within the RII category for allotment.
How to Apply for an IPO in India
The standard method is through ASBA (Application Supported by Blocked Amount). When you apply, the bid amount is blocked (not debited) in your bank account. If you receive allotment, only the required amount is debited; if not, the block is released. You can apply through your bank’s net banking portal, UPI-based applications through broker apps (Zerodha, Groww, Angel One), or directly through your demat account provider.
For UPI-based applications: select the IPO on your broker app, enter the lot size and bid price, approve the UPI mandate on your payment app (Google Pay, PhonePe, etc.), and wait for allotment. The entire process takes 5 minutes. Allotment results are typically announced within 6-7 business days after the IPO closes.
How to Evaluate an IPO
Not all IPOs are good investments. Many companies come to market at inflated valuations to maximize fundraising. Here is how to evaluate an IPO critically:
Read the Prospectus: Check the company’s revenue growth, profitability, debt levels, and purpose of the IPO. “Fresh issue” IPOs (company raises new capital) are generally better than “Offer for Sale” (existing shareholders selling their stakes) — the latter means early investors want to exit, which warrants scrutiny.
Valuation Comparison: Compare the IPO’s PE ratio at the issue price with listed peers. If the IPO company has a PE of 60 but similar listed companies trade at PE of 30, you are paying a premium for potential that may or may not materialize.
Promoter and Management Quality: Research the promoter’s track record, management experience, and corporate governance history. Strong promoters with clean track records and skin in the game (high promoter holding post-IPO) inspire more confidence.
Listing Day and Beyond
On listing day, the stock opens at a price determined by supply and demand, which can be significantly above (listing premium) or below (listing discount) the issue price. Many retail investors apply for IPOs hoping for quick listing gains, but this is essentially speculation. Some IPOs like Zomato and LIC listed at a discount and caused losses for listing-day sellers, while others like Tata Technologies gave massive listing premiums.
The better approach is to evaluate an IPO as a long-term investment. If the company has strong fundamentals, apply regardless of expected listing gains. If the valuation is expensive, skip the IPO — you can always buy the stock on the exchange later at a better price after the initial hype subsides.
Frequently Asked Questions
How much money do I need to apply for an IPO?
The minimum application is one lot, and lot sizes vary by IPO (typically ₹14,000-15,000 to stay within SEBI’s retail limit of ₹2 lakh). Retail investors can apply for multiple lots up to a maximum application value of ₹2 lakh. The money is only blocked in your bank account through ASBA — not debited — so if you don’t receive allotment, your funds are released within a few days.
What are the chances of getting IPO allotment?
For heavily oversubscribed IPOs (like 50-100x oversubscription), the chances are very low — often below 5% for retail investors. Each PAN gets equal probability in the lottery, so applying for one lot or maximum lots gives the same chance. To improve odds, family members can apply separately from different demat accounts. For less popular IPOs with lower subscription, allotment chances are higher but the listing gains potential may also be lower.
Should beginners invest in IPOs?
IPOs are generally not recommended for absolute beginners. New investors should first build a foundation through SIP in index funds and learn fundamental analysis before evaluating individual IPOs. Many IPOs are priced at premium valuations with limited trading history, making analysis harder. Once you are comfortable reading financial statements and comparing valuations, selectively participating in well-priced IPOs can be a reasonable strategy.
Related Articles
- What Is a Demat Account?
- What Is SEBI?
- What Is PE Ratio?
- How to Analyze a Company
- What Is Market Capitalisation?
About the Author
Mithun Srivastava is the founder of MithunSrivastava.com, a free stock market education platform for Indian investors. With a passion for making finance accessible to everyone, Mithun creates practical guides, calculators, and glossary resources to help beginners start their investing journey with confidence.