IPO fishes are always swimming in the market. With that said, in 2024, 268 IPOs were launched in India, and many people invested in them as well. But what does IPO mean, and why is this wave of interest among investors?
In this blog, we'll explore what an IPO is, why companies issue them, their history, different types, and more.
Keep reading to find the right reasons to invest in IPOs and not follow a random trend!
Introduction: What Is An IPO In The Stock Market?
IPO full form in the share market is "Initial Public Offering." It is the first time a company steps into the market and tries to raise funds (money) from the public. Think of it as a grand opening of a company in a way that everyone can apply and get a chance to get small ownership in that firm.
In the IPO process, the shares of the listing company are made available to the general public. So, investors can apply for lots in different quotas and become the rightful owners of those IPO shares. In other words, the company plans to sell its stake in exchange for equity capital.
A Brief History Of IPOs
The first footprint of IPOs started during the 17th century. In 1602, the Dutch East Indian Company (VOC) offered shares of its company to the public to raise capital. When talking about India, Reliance Industries was the first company to go for an IPO in 1977. It was even before the constitution of the Securities and Exchange Board of India (SEBI).
In the later stages, India also witnessed the Initial public offering of an NGO ("SGBS Unnati Foundation") in 2023. Following the trend, more than 6,857 companies participated in the IPO trend.
Why Do Companies Launch IPOs?
Four simple reasons why any company would go for IPOs, with the prime one being raising capital. Let us explore the remaining reasons that validate the launch of IPO stock in the market.
Access To Additional Capital For Operations
The primary reason any company would turn to an IPO is to access capital, which can then be utilized for various purposes. It acts as a catalyst for growing the company and supporting the daily operations. If needed, they may invest this amount for future projects in the pipeline.
Provide An Exit For Existing Shareholders.
Serving as a branch, this funding helps the existing shareholders (like angel investors) to get an exit from the company. They may sell their stake and realize investment value after the IPO gets listed.
Create A Company's Presence And Increase Credibility
Also, a major reason why companies prefer IPOs is to build up their presence across the market. With the news of the launch, many people tend to research the company. It eventually builds enough presence among the investors.
Strengthen The Balance Sheet
At times, companies do have a high debt-to-equity ratio, which often calls for an IPO. In a 2023 report, nearly 90% of the companies use the proceeds to repay their debt. It helps in reducing liabilities and boosting investor confidence.
Types Of IPOs: Which Companies Go For IPO
In general, there are two types of IPOs that companies usually file for, namely Fixed Price Issue and Book Building Issue.
Fixed Price Issue
As the name suggests, this type of issue has a fixed price set by the company at the time of the IPO announcement.
- Investors know the exact price they need to pay per share.
- The demand for shares is revealed only after the issue closes.
- It's simpler but offers less price discovery compared to book building.
Book Building Issue
In a Book Building IPO, the company offers a price band (e.g., ₹100–₹120, a 20% range), and investors bid within this range. The final price is set after bidding closes, based on demand.
- Bidding demand is visible in real-time on stock exchange websites.
- QIBs pay only 10% advance, while others pay 100% upfront.
- Allocation works 50% to QIBs, 35% to retail investors, and 15% to others.
How An IPO Works: Key Players and Process Involved
While an IPO announcement may sound easy, the backstage preparation is detailed and involves many stakeholders, for instance;
Key Stakeholders Involved:
- Company's Promoters & Board – They decide to go public and outline fundraising goals.
- Investment Bankers (also Underwriters) – Handle IPO pricing, underwriting, and related activities.
- Bankers to an Issue - They help in managing funds collected during the IPO process.
- Legal Advisors – They ensure compliance with SEBI and company law.
- Auditors & Accountants – Prepare and certify financial statements.
- Registrars (RTA) – RTAs manage IPO applications and allotments.
- SEBI & Stock Exchanges – Any IPO going live requires approval from the SEBI and stock exchanges.
- Self-Certified Syndicate Banks (SCSB) - They are SEBI-certified banks responsible for accepting applications, blocking and unblocking of funds, and coordinating with brokers.
IPO Process
Inclusive of the above stakeholders, almost all companies going for IPO follow this process. It includes;
Internal Approval (includes Promoters and the board who approve the IPO decision)
Team Formation (Here, the appointment of lead managers, legal counsel, auditors, and registrars happens.)
Due Diligence & DRHP Filing (At this stage, companies prepare financials, business risks, and file the Draft Red Herring Prospectus (DRHP) with SEBI.)
SEBI Review & Approval (Here, SEBI examines the DRHP, asks for clarifications, and approves the final Red Herring Prospectus (RHP))
Marketing (The company then pitches the IPO to institutional and retail investors through various means.)
Price Band Declaration & Bidding (Now, the price band is set, and the bidding window opens (usually 3–5 days) for investors.)
Allotment & Refunds (Based on demand, shares are allotted; excess applications are refunded.)
Stock Market Listing (Shares are listed on NSE/BSE; trading begins on listing day.)
What To Know Before Investing In An IPO
Before applying for an IPO, you, as an investor, must follow these golden rules, which include;
- Read the Red Herring Prospectus (RHP) properly.
- Compare the IPO pricing with listed peers to see if it's fairly valued.
- Understand the company's business model in terms of risks, strengths, past history, and other relevant factors.
- Understand the IPO allotment process thoroughly. Most of the time, oversubscription leads to partial allotment or lottery-based selection, especially for retail investors.
- Review the company's financials (like Balance Sheet, Profit & Loss Account), revenue trends, cash flow treatment, debt levels, etc.
- Check your investment limit, where retail investors can apply up to ₹2 lakh per IPO.
Conclusion
Whether you're investing for the first time or multiple times, understanding what an is IPO in the stock market is crucial. While companies use it to raise capital, there are other reasons as well. Having similar awareness helps investors compare IPOs and their profitability metrics.
At the same time, people tend to apply because of peer pressure. However, it is crucial to understand the purpose of an IPO and the mistakes to avoid when applying. While they sound overwhelming, consider having your own research deployed as a safer measure.
