Chapter 2 of 5

How an IPO works

8 min read

An Initial Public Offering is the first time a company sells shares to the public. Money raised can fund growth or repay debt, or part of it can go to existing owners selling their stake.

The journey of an IPO

• The company files a draft offer document with SEBI and, once cleared, a final prospectus.
• A price band is announced, for example ₹100 to ₹105 a share, along with the lot size.
• The issue opens for subscription for a few days. Applicants bid within the band and funds are blocked, not debited, in their bank account.
• Shares are allotted. Under SEBI's framework listing happens within three working days of the issue closing, so allotment is around the next day and refunds or unblocking around the day after.
• The shares list and begin trading on the exchange.

Fresh issue and offer for sale

In a fresh issue the company receives the money. In an offer for sale, existing shareholders sell their shares and the company receives nothing. Many IPOs are a mix, and the split tells you where the money is going.

Reading the prospectus

• Objects of the issue: what the money will be used for.
• The company's financials over several years, not just the latest.
• Risk factors, which are often blunt and worth reading.
• Promoters' background and any pending litigation.
• How the price compares with similar listed companies.

Listing day

On listing day the price is discovered in a pre-open session, and the first-day price band depends on issue size: ±20% for issues above ₹250 crore and ±5% for smaller ones. A big listing gain does not make a company a good investment, and a loss on day one does not make it a bad one.

This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.