IPO (initial public offering)
An IPO, or initial public offering, is when a private company sells its shares to the public for the first time and gets listed on a stock exchange.
What it is
Before an IPO, a company is owned by its founders, early investors and sometimes employees. In an IPO it offers shares to the public. Once the issue is complete, its shares are listed on the NSE and/or BSE and anyone can trade them.
An IPO can be a fresh issue, where the company creates new shares and receives the money, an offer for sale, where existing owners sell some of their shares and receive the money, or a mix. It matters which: money from an offer for sale goes to the sellers, not into the business.
How it works
The company files an offer document, called the draft red herring prospectus, with SEBI. It describes the business, its finances, risks and how the money will be used. Reading at least the business, financials and risk sections is the best way to understand the issue.
Shares are usually offered in a price band, and you apply in fixed lots. In India, applications are made through ASBA or UPI, so your money is blocked in your bank account rather than taken, and released if you are not allotted shares. When an issue is heavily oversubscribed, retail allotment is commonly decided by a lottery.
Risks to understand
An IPO has a short public track record, and the company and its sellers choose when to come to market, often when conditions are favourable for them. The price is set to be attractive to the sellers too.
Listing-day gains are not guaranteed. Some IPOs list below their issue price, and some that list well fall later. Judge an IPO on the business and its valuation, as you would any listed company.
Applying for an IPO
An IPO has a price band of ₹280–₹295 and a lot size of 50 shares. One lot at the upper end costs ₹295 × 50 = ₹14,750. You apply for one lot through UPI and ₹14,750 is blocked in your bank account. If you are not allotted shares, the block is released. If you are, the shares arrive in your demat account before listing.
Common mistakes
- Applying only because an IPO is popular or heavily oversubscribed.
- Ignoring whether the money goes to the company or to selling shareholders.
- Not reading the risk factors in the offer document.
- Assuming every IPO lists at a gain.
In an offer for sale, who receives the money raised?
- The existing shareholders who are selling their shares
- The company, to fund expansion
- SEBI
Show the answer
The existing shareholders who are selling their shares. In an offer for sale, existing owners sell their shares, so the money goes to them. Only a fresh issue brings new money into the company.
Common questions
How does IPO allotment work?
If an issue is oversubscribed, not everyone gets shares. For retail investors, allotment is commonly done by a lottery among valid applications.
Is investing in an IPO safe?
An IPO carries the same risks as any share, plus less public history to judge from. Listing gains are not guaranteed.
Do I need a demat account to apply for an IPO?
Yes. Allotted shares are credited to your demat account, so you need one along with a bank account that supports ASBA or UPI.
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