What is an IPO in India?

Before an IPO, a company is private: it is owned by its founders, a handful of employees and a few early investors, and its shares do not trade anywhere. An IPO is the event that moves it into the public market, where its shares are listed on an exchange and can be bought and sold freely by anyone. This first sale happens in what is called the primary market, where the shares come straight from the company and its selling owners; every trade after listing happens in the secondary market, between investors, and no longer sends money to the company.

Companies go public for two connected reasons, and most issues do both. The first is to raise capital. In a fresh issue, the company creates brand new shares and sells them, and the money it collects goes into the business, to fund expansion, repay debt or shore up the balance sheet. The second is to give existing owners an exit. In an offer for sale, founders or early investors sell some of their own shares, and that money goes to them, not to the company. Reading which of these dominates a given IPO is one of the most useful things you can do, because it tells you whether you are funding a business or buying out its early backers.

The Indian process is a sequence with a regulator at the front of it. The company files a draft red herring prospectus, the DRHP, with the Securities and Exchange Board of India. SEBI reviews the disclosures, the finances, the risk factors and the stated use of the money, and issues its observations, after which the document is updated. It is important to understand what this review is and is not: SEBI checks that the company has disclosed properly, it does not approve the price or vouch for the company as a good investment. The judgement of value is left to you.

Once cleared, the company fixes a price band, a narrow range within which bids are placed, and the issue opens for a short window, typically about three working days. Most Indian IPOs use book-building, where investors bid at or above the floor of the band and the final price is discovered from demand. A day before the issue opens, large institutions can be allotted shares as anchor investors, under a lock-in, which is meant to signal serious institutional interest. The rest of the issue is divided into reserved portions for the institutional, non-institutional (larger and high-net-worth) and retail categories; these reservations are set by regulation and vary with the route the company takes, so treat any single split as broad rather than fixed.

The mechanics of applying are deliberately simple and, importantly, protective of your money. You need a demat account to hold any shares you are allotted, and a bank account or brokerage app that supports ASBA or UPI. The defining feature of both is that the application money is blocked in your own bank account, not paid out: it stays yours, earning whatever your account pays, until the allotment is decided. Only if shares are actually allotted is the money debited. This is why an IPO application is not a purchase in the ordinary sense; it is a bid with your funds held in escrow by your own bank.

You apply in lots, where a lot is a fixed bundle of shares set for each issue and one lot is the minimum you can bid for. You can bid at a specific price inside the band or, more commonly for retail, at the cut-off, which simply means you accept whatever final price is discovered. When an issue is oversubscribed, that is, when applicants want more shares than exist, the retail portion is allotted by lottery, so applying for several lots does not buy certainty and you may receive one lot or none. The table sets out the four things a first-time applicant most needs to get right.

Here is the framing that most IPO coverage leaves out, and it is the single most useful idea on this page. An IPO is a sale, and it is worth asking, as with any sale, who is on the other side and what they know. On the selling side are the insiders: the founders, the early investors and the pre-IPO funds, advised by bankers whose job is to achieve the highest defensible price. These are the people who know the business best, and they, not you, choose the price band and the moment to sell. They tend to go public when conditions are favourable and sentiment is strong, which is precisely when prices are least likely to be cheap.

On the buying side is the public, including you, judging the company from a prospectus and the impressions left by a roadshow. The demand you are bidding into is not purely spontaneous; it is partly built by marketing, media coverage and the signalling of anchor investors. None of this is sinister, and plenty of IPOs are perfectly fair deals. But the structure has a clear implication: the informed party sets the price and times the sale, so you cannot assume the price contains a gift. The burden of deciding whether the asking price is reasonable for the business sits with the buyer, which is an ordinary valuation question best answered by comparing the company against already-listed peers on measures like market capitalisation and earnings, not by the buzz around the issue.

An IPO is a sale, and the people setting the price are the ones who know the business best and choose when to sell it. That is exactly why the burden of judging value is on you.

The hope that draws most retail applicants is the listing gain, the difference between the issue price and the price when trading opens. It is a real phenomenon: across many IPOs and many markets, first-day returns have tended to be positive on average, a pattern researchers call under-pricing, where issues are priced a little below where they first trade. The mistake is to read that average as a promise. It is a tendency across a large sample, not a property of the next stock, and a substantial number of issues list flat or below their issue price. New listings can move sharply in both directions in their first days, and a big subscription number reflects expectation, not a guaranteed result.

The more important distinction is between two entirely different activities that an IPO invites you to confuse. A flip is a short-term trade: apply, hope for a pop, sell on or soon after listing. An investment is owning a piece of the business for years because you judge it undervalued. These need different skills, different holding periods and carry different costs and taxes, and blurring them is a classic error; the companion guide on trading versus investing draws the line in full. Deciding which one you are doing before you apply is half the discipline of IPO investing.

Because IPOs arrive wrapped in marketing and scarcity, they attract a predictable set of traps. The first is plain hype: heavy coverage, a countdown, a sense that everyone is applying, all of which manufacture urgency and crowd out the boring question of what the business is worth. The second is the grey market premium, an unofficial and unregulated price at which applications or shares are said to trade before listing. It is a gauge of mood, not a measure of value; because it is unregulated it can be thin, rumour driven or manipulated, and it frequently evaporates by the time a stock lists. Leaning on it means outsourcing your decision to an anonymous crowd.

The third and most avoidable trap is applying without reading the prospectus. The DRHP exists precisely so you can judge the business, and skipping it in favour of a headline or a tip is choosing to bid blind. At a minimum, read how the company plans to use the money, its revenue and profit trend over recent years, its debt, the fresh-issue versus offer-for-sale split, the promoter holding after listing, and the risk factors the company is legally required to disclose. Treating an IPO as a guaranteed quick gain, and applying on sentiment rather than substance, is one of the more common and expensive assumptions in the market, and it sits alongside the other common retail mistakes that quietly drain accounts.

Two features of the Indian market are worth holding clearly. The first is the role of SEBI: it enforces disclosure and a fair process, which protects you from being kept in the dark, but it does not vet the price or promise that an issue is a good investment. A clean regulatory process and a bad price can coexist. The second is that not all IPOs are the same animal. A mainboard IPO is a larger company listing on the main platforms of the NSE or BSE, with its document reviewed by SEBI and a reserved retail portion. An SME IPO is a smaller company listing on the dedicated SME platforms, where the document is vetted by the exchange rather than SEBI, the minimum application is far larger, and the shares are often much less liquid and less researched.

The gap matters because the risks are genuinely different. SME issues tend to be smaller, younger companies with shorter public track records, and the much larger minimum application means a single SME bid commits far more of your money than a mainboard one. When either kind is heavily oversubscribed, the retail lottery makes allotment a matter of chance, so the popularity that makes an issue feel like a sure thing is the very thing that lowers your odds of getting any shares. None of this makes SME IPOs bad, but they should not be judged by the same yardstick as a large mainboard issue.

Put the whole picture together and an IPO stops being a lottery ticket and becomes what it is: a company raising money at a price its insiders have chosen, disclosed in a document you are free to read. Your job is not to guess the listing pop but to decide whether that price is reasonable for what you are buying, which is an ordinary valuation question. Building exactly that habit, of valuing what you buy before you buy it, rather than reacting to hype, is the discipline that runs through the method we teach.

• The IPO framework and process. The Securities and Exchange Board of India, through its Issue of Capital and Disclosure Requirements Regulations, governs the draft red herring prospectus, the book-building process, the price band and the category allocations for a public issue. sebi.gov.in
• How retail investors actually behave. A Securities and Exchange Board of India study of investor behaviour in initial public offerings (2024) found that a large share of individual investors sold their allotted shares within a week of listing, and were quicker to sell shares that had gained, evidence that much IPO participation is short-term flipping rather than investment. sebi.gov.in
• Under-pricing and long-run performance. Jay R. Ritter, The Long-Run Performance of Initial Public Offerings (Journal of Finance, 1991), and the wider research on IPO under-pricing, document that first-day gains are common on average while long-run returns often lag the market, the basis for treating the listing pop as real but unreliable. site.warrington.ufl.edu
• Listing mechanics and SME platforms. The National Stock Exchange of India and BSE listing and SME platform material describes how shares list and trade, and how mainboard issues differ from those on the dedicated SME platforms. nseindia.com
• Illustrative figures only. The rupee amounts and category descriptions in this guide are illustrative and are set separately for each issue and by regulation; they are meant to show how the process works, not to state a current specification. Always check the actual figures in the prospectus of a specific issue.