What is IPO, Meaning, Definition, Types, Components, Examples, Purpose and Key Features

June 26, 2025

What is IPO (Initial Public Offering)?

An Initial Public Offering (IPO) is the first sale of a company’s shares to the public. Before an IPO, a company is privately owned by founders, early investors, or private equity firms. Through an IPO, the company lists its shares on a stock exchange such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India allowing anyone to buy ownership stakes. This transition from private to public status opens the door for wider investment, provides liquidity for early backers, and raises capital for the company’s growth plans.

What is the Full Form of IPO?

The term IPO stands for Initial Public Offering. “Initial” refers to it being the first time the company issues shares to the public. “Public” indicates that shares are available to any eligible investor, not just private or institutional ones. “Offering” signifies the sale of these newly issued shares. Together, the phrase captures the essence of making a private business publicly owned by distributing its equity among general investors for the first time.

What is IPO in Stock Market?

In the stock market, an IPO represents the debut of a company’s equity on a public trading platform. It inserts new shares into market circulation, increasing the total number of publicly traded securities. Investors can place bids during the IPO window, which determines how many shares they will receive and at what price. Once the IPO concludes, shares begin trading openly, and their prices fluctuate based on supply, demand, and market sentiment.

Definition of IPO

Formally, an IPO is a process regulated by securities authorities such as the Securities and Exchange Board of India (SEBI) in which a company issues a set number of shares to raise funds from the public. The company files a draft prospectus, prepares financial statements, and undergoes a review process to ensure compliance with disclosure norms and investor protection guidelines. Only after SEBI approval can the company proceed to sell shares to retail and institutional investors.

Meaning of IPO

From an investor’s viewpoint, an IPO offers a chance to invest in a company at its market debut price. From the company’s standpoint, it opens access to a larger investment pool beyond private funding sources. IPOs often generate significant media coverage, boosting brand visibility and credibility. Consequently, a successful IPO can act as a powerful marketing tool, attracting customers, suppliers, and top talent to the business.

How Does IPO Work?

Preparation and Due Diligence: The company hires underwriters usually investment banks to guide the IPO. They conduct financial audits, legal checks, and market research.
Filing the Draft Prospectus: The company submits a draft prospectus (DRHP) to SEBI, outlining business operations, financials, risk factors, and intended use of funds.
Marketing (Roadshow): Management tours major cities to pitch the IPO to institutional investors, detailing growth plans and financial health.
Price Band and Book Building: Underwriters set a price range. Investors bid within this band during the subscription period.
Allotment: Shares are allocated based on demand. If demand exceeds supply, the IPO is oversubscribed, and allotments may be pro-rated.
Listing: Shares start trading on the chosen exchange at a price determined by market demand, which may differ from the IPO price.

Types of IPO

Book Building IPO: Investors bid within a price band, and the final price is set after assessing demand. This method is popular in India for large issues.
Fixed Price IPO: The issuer fixes the share price in advance. Investors know exactly what they will pay, making the process simpler but less flexible.
Offer for Sale (OFS): Existing shareholders sell their shares to the public, rather than the company issuing new shares. The company does not raise fresh capital in this model but provides liquidity to existing investors.

Benefits of IPO

Capital Raising: Fresh funds support expansion, research, acquisitions, or debt repayment.
Enhanced Public Profile: Listing often raises a company’s visibility among customers and partners.
Liquidity for Early Investors: Founders, employees, and early backers can sell shares post-lock-in to realize returns.
Valuation Benchmark: Public trading provides a market-based valuation, aiding future fundraising or mergers.
Attracting Talent: Public companies can offer stock options to employees, improving recruitment and retention.

Features of IPO

Regulatory Oversight: SEBI reviews financial statements and disclosures to protect investors.
Prospectus Requirement: Issuers must publish a detailed prospectus outlining risks, financials, and business plans.
Lock-In Period: Promoters and certain insiders must hold shares for a specified period (e.g., one year) before selling.
Underwriting: Investment banks guarantee the issue’s success by buying unsold shares at a predefined price.
Lot Size: The minimum number of shares one must apply for, set by the issuer (e.g., 100 shares per lot).

Examples of IPO

IRCTC (2019): Indian Railway Catering and Tourism Corporation raised funds to expand its digital services.
Zomato (2021): The popular food delivery platform launched its IPO to fuel new market entry and technology upgrades.
Paytm (2021): One97 Communications (Paytm) went public to strengthen its payments and financial services arm.
Coal India (2010): One of India’s largest public issues, helping ensure fuel security and operational expansion.
LIC (2022): Life Insurance Corporation’s IPO was the largest in Indian history, broadening ownership and raising capital.

Components of IPO

Issue Size: Total number of shares offered multiplied by the IPO price.
Face Value: The nominal value per share (e.g., ₹10), distinct from the issue price.
Offer Price / Price Band: The price at which shares are sold to investors, or a range within which bids can be placed.
Lead Manager / Underwriter: Investment banks responsible for managing the IPO, marketing, and underwriting unsold shares.
Registrar: Entity managing share allotment, refunds, and coordination with depositories.
Brokerage: Fees charged by brokers to investors for placing IPO applications.

What is the IPO Process?

Appointment of Advisors: Select underwriters, legal counsel, and auditors.
Due Diligence and Documentation: Prepare the draft prospectus, financial statements, and risk disclosures.
SEBI Approval: Submit documents; respond to SEBI queries until clearance.
Marketing (Roadshow): Present the IPO to institutional investors across major cities.
Bidding / Subscription: Open the issue to institutional, non-institutional, and retail investors via the book-building window.
Allotment: Allocate shares, process refunds, and credit shares to demat accounts.
Listing: Begin trading on BSE and NSE, monitor listing day price movement.

What is the Purpose of IPO (Initial Public Offering)?

Raising Capital: Finance expansion, R&D, working capital, or acquisitions.
Debt Reduction: Use proceeds to pay off high-interest loans, improving the balance sheet.
Market Visibility: Gains consumer trust when a regulator-approved company lists publicly.
Liquidity Creation: Allows founders and early investors to convert equity into cash post lock-in.
Strategic Acquisitions: Public shares can be used as acquisition currency for mergers and partnerships.

How is an IPO Priced?

Book Building: Price band is announced. Investors bid within the band. Final price is set based on demand and bids from institutional investors.
Fixed Price: A single price is decided upfront. All investors pay the same price, irrespective of demand.
Discount to Market: For Offer for Sale, shares from existing shareholders may come at a slight discount to market price to ensure full subscription.
Valuation Methods: Underwriters use methods such as discounted cash flow (DCF), comparable company analysis, and price-to-earnings (P/E) ratios to set the price range.

What is the IPO Timeline?

Pre-IPO (3-6 months): Company selects advisors, completes due diligence, drafts prospectus.
Regulatory Review (30-60 days): SEBI review and queries, revisions to the draft prospectus.
Roadshow (1-2 weeks): Meet investors across major financial centers.
Subscription Period (3-5 days): Investors place bids/applications.
Allotment and Refunds (1-2 weeks): Shares allotted and refunds processed.
Listing (Next trading day): Shares begin trading publicly, usually 4-5 days after subscription closes.

What is the Minimum Amount for an IPO?

The minimum investment in an IPO depends on the lot size and price band set by the issuer. For example, if the lot size is 100 shares and the issue price is ₹150 per share, the minimum outlay is ₹15,000. Companies may choose lot sizes as low as 10 shares or as high as 200 shares. Consequently, prospective retail investors should multiply the lot size by the lower end of the price band to determine the minimum application amount.

Performance Factors of IPOs

Market Sentiment: Bullish markets often support strong IPO listings, while bearish markets can dampen demand.
Company Fundamentals: Strong earnings growth, healthy balance sheet, and clear business model attract investors.
Sector Trends: Industries in favor such as technology or healthcare tend to see better IPO performance.
Pricing Strategy: An attractively priced IPO motivates investors, reducing risk of undersubscription.
Macroeconomic Conditions: Interest rates, inflation, and geopolitical stability influence overall market appetite.

Why Does a Company Offer an IPO?

Fundraising for Growth: Raise capital for capacity expansion, new product development, or market entry.
Debt Management: Replace expensive debt with equity, improving financial ratios.
Brand Building: Public status enhances credibility with customers, suppliers, and partners.
Liquidity for Shareholders: Provides a platform for founders and early investors to partially or fully monetize holdings.
Employee Incentives: Stock options become more attractive when they have a clear market value.

Eligibility Criteria for Offering an IPO

Companies must meet SEBI’s listing requirements, which may include:

Track Record: Three years of audited financial statements with prescribed profits in at least two of those years.
Net Worth: Minimum net worth requirement (e.g., ₹1 crore) before filing.
Capital Requirements: Minimum capital raised in prior rounds, if any.
Corporate Governance: Proper board composition, independent directors, and audit committee.
Compliance History: No significant regulatory violations or pending legal cases that could affect operations.

Things You Should Know before Investing in IPO

Read the Prospectus: Understand financials, risk factors, and business model described in the Red Herring Prospectus.
Check Valuation: Compare IPO valuation with peer companies in the same sector.
Assess Lock-In Period: Insiders may hold shares locked in for one year; post lock-in selling can pressure price.
Monitor Subscription Levels: High oversubscription may lead to strong listing gains but also intense competition for allotment.
Consider Long-Term Potential: IPOs can be volatile initially; a longer horizon may yield better returns.

Can Anybody Invest in an IPO?

Most resident Indian individuals with a valid PAN card, bank account, and demat account can apply. Non-Resident Indians (NRIs), Hindu Undivided Families (HUFs), and corporates may also participate under applicable rules. Minors cannot directly apply, but their guardians may invest on their behalf. Investors should use the ASBA (Application Supported by Blocked Amount) facility through their bank to ensure funds are earmarked only upon allotment.

Is an IPO a Good Investment?

An IPO can offer high initial returns if priced attractively and supported by strong demand. However, they also carry risks such as unproven management track records or market volatility. While some IPOs list significantly above the issue price, others may trade below it. Hence, whether an IPO is “good” depends on:

Company’s fundamentals
Valuation at issue price
Investor’s risk appetite
Long-term vs. short-term investment horizon

How to Invest in an IPO?

Open a Demat and Trading Account: Choose a broker or bank that offers IPO application facilities.
ASBA Application: Use your bank’s ASBA-enabled net banking to apply online. Provide UPI or bank details for blocking funds.
Select Price Option: Choose a specific price within the band or opt for the “cut-off” price.
Monitor Allotment: Check the BSE/NSE website or your broker’s portal on the allotment date.
Listing Day: Shares automatically credit to your demat account and can be sold or held as desired.

Who Gets the Money From an IPO?

The issuing company receives the majority of the proceeds, net of underwriting fees, legal and regulatory expenses, and listing charges. In an Offer for Sale, existing shareholders such as promoters, private equity investors, or early backers sell their shares and receive the net proceeds. Underwriters and banks earn their fees, while SEBI and bourses collect listing and regulatory charges.

Tips to Invest in IPO

Do Your Research: Read the prospectus carefully and study peer valuations.
Diversify: Do not allocate all your funds to one IPO; maintain a balanced portfolio.
Stay Within Budget: Only block funds you are comfortable with until allotment.
Use Trusted Brokers: Ensure your broker has a reliable ASBA platform and a good track record.
Be Patient: Wait for the initial volatility to settle before deciding to sell or hold.

Disadvantages of IPO

High Costs: Issuing an IPO involves significant underwriting, legal, and compliance fees.
Regulatory Burdens: Public companies face ongoing disclosure requirements and governance norms.
Volatility: Newly listed shares can swing wildly in price, increasing risk.
Control Dilution: Promoters may lose some ownership and decision-making power.
Lock-In Constraints: Early investors and promoters must wait out lock-in periods before selling.

History of IPOs

The concept of public share issuance dates to the Dutch East India Company’s IPO in 1602, often considered the first modern IPO. In India, the Bombay Stock Exchange began operations in 1875. Following liberalization in 1991, IPO activity surged as private enterprises sought public capital. Landmark Indian IPOs include Coal India (2010), IRCTC (2019), Zomato (2021), and LIC (2022). Over decades, IPOs have evolved from simple fixed-price issues to sophisticated book-building mechanisms that better align pricing with investor demand.

Summary

An IPO is the first sale of a company’s shares to the public, converting it from private to public status.
IPO stands for Initial Public Offering and involves regulatory review by SEBI in India.
The IPO process includes due diligence, prospectus filing, roadshows, bidding, allotment, and listing.
Types of IPOs include book building, fixed price, and offer for sale (OFS).
Benefits include capital raising, liquidity for early investors, increased brand visibility, and market-based valuation.
Risks involve high costs, regulatory burdens, price volatility, and potential dilution of control.
Retail investors apply via ASBA, with minimum investment set by lot size and price band.
Successful IPO investing requires careful analysis of prospectus, valuation, company fundamentals, and market conditions.
Historic IPO milestones range from the Dutch East India Company in 1602 to major Indian issues like Coal India, IRCTC, Zomato, and LIC.