Initial Public Offering

Also called: IPO · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

An Initial Public Offering (IPO) is the first time a company sells its shares to the general public. After the IPO, its shares are listed, which means they can be bought and sold on a stock exchange.

• An IPO takes a company from privately held to publicly listed. It lets the company raise equity capital (ownership money that it never repays and pays no fixed interest on).
• It also lets household savings flow straight into businesses through the primary market (the market where new securities are sold and fresh money goes to the issuer).

Explanation

How an IPO works: fresh issue, OFS and the offer documents

• Two parts inside one IPO:
• Fresh issue = the company creates new shares. The money goes to the company.
• Offer for sale (OFS) portion = existing owners, such as promoters or early investors, sell some of their shares. The money goes to those sellers, not to the company.

• Many IPOs mix both parts.

• Offer documents, in order: 1. DRHP (Draft Red Herring Prospectus) = the first draft. It is filed with SEBI for comments and made public so investors can read it. From 2025-26, a short standard summary, the abridged prospectus, must also be filed at the DRHP stage and put online [1]. 2. Red Herring Prospectus (RHP) = gives company details and the price band. It does not give the final price or the number of shares. It is called "red herring" because of the red warning on its cover saying the document is not final. 3. Final prospectus = filed after the price is fixed. It gives the final price and the number of shares.

How the price is set: book building vs fixed price

• Book building = investors bid within a price band, and demand decides the final price.
• The merchant banker keeps a "book" of all bids.

• The price at which demand clears the issue becomes the issue price.

• Rule on the band: the cap (top of the band) can be at most 120% of the floor (bottom of the band).

• Worked example: floor = ₹100 → cap at most ₹100 × 1.20 = ₹120. So ₹100–₹120 is allowed, but ₹100–₹125 is not.

• Cut-off price: a retail investor can tick "cut-off". This means they accept whatever final price is set, so they do not have to guess it.

• Fixed-price issue = the price is announced in advance. Investors only choose how many shares to apply for. Demand is known only after the issue closes.

Who gets the shares: allocation and anchor investors

• Main-board book-built split:

Category	Share of issue	Who they are
QIBs	up to 50%	Big expert institutions: banks, mutual funds, insurers, FPIs, pension funds
NIIs	at least 15%	Rich individuals and corporates bidding above ₹2 lakh
Retail (RIIs)	at least 35%	Individuals bidding up to ₹2 lakh

• QIB (Qualified Institutional Buyer) = an institution judged expert enough to evaluate capital-market investments.

• In main-board IPOs, NII shares are given out by draw of lots, not in proportion to bid size [2].

• Anchor investor = a QIB that is given shares one day before the IPO opens. A big name buying early signals confidence to other investors.

• Anchors can take up to 60% of the QIB portion.
• Lock-in (a period when they cannot sell): 50% of anchor shares for 30 days, the other 50% for 90 days. This stops anchors from selling everything on listing day.

• Since 2025-26, 40% of the anchor portion is reserved: 33.33% for domestic mutual funds and 6.67% for life insurers and pension funds [1].

• Worked example (₹1,000 crore IPO):

• QIBs up to ₹500 crore, NIIs at least ₹150 crore, retail at least ₹350 crore.
• Anchors up to 60% of ₹500 crore = ₹300 crore.
• 40% of that is reserved (₹120 crore): about ₹100 crore for mutual funds and about ₹20 crore for insurers and pension funds.

Money flow and price support

• ASBA (Application Supported by Blocked Amount) = the application money stays blocked in the investor's own bank account. It is taken out only if shares are allotted. The investor keeps earning savings interest meanwhile.
• UPI mandate (2019) = retail investors can block funds through a UPI app on their phones.
• T+3 listing = shares must be listed within three working days after the issue closes. Money stays blocked for fewer days, so investors carry less risk.
• Green shoe option = the issuer can allot up to 15% extra shares. A stabilising agent uses them to support the price after listing.
• Price falls below the issue price → the agent buys shares in the market → the price is propped up.

• Worked example: ₹1,000 crore issue → up to ₹150 crore of extra shares.

• Underwriting = an investment bank promises, for a fee, to buy any unsold part of the issue. This makes sure the company gets its money.

• Grey market premium (GMP) = the unofficial premium at which IPO shares trade informally before listing. It is unregulated (outside SEBI and the exchanges), and these trades cannot be enforced in court.

In India

• Regulator and rulebook: SEBI regulates IPOs under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR"). These rules cover who can issue shares, what must be disclosed, how shares are allotted and lock-in periods.
• Exchanges: after the IPO, shares list on BSE (1875) and NSE. Smaller firms can list on SME platforms such as BSE SME (2012) and NSE Emerge.
• Process milestones: ASBA started in 2008 and became mandatory in 2016. The UPI mandate for retail came in 2019. T+3 listing became mandatory from December 2023 (earlier T+6).
• Latest size:
• 2025-26: 366 IPOs raised a record ₹1,88,616 crore [1].
  • Main board: 109 IPOs raised ₹1.8 lakh crore, with a median issue size of ₹760 crore [1].
  • SME listings reached a record 257 [1].
• 2024-25: 320 IPOs raised ₹1,72,328 crore [1].

• India's share of global IPO listings was 30% in 2024, up from 17% in 2023 [3].

• SME IPO clean-up:

• 196 SME IPOs raised over ₹6,000 crore in 2023-24 [2].
• SEBI found some firms sending IPO money to promoter-linked shell companies (companies with no real business) and booking fake sales among related parties [2].

• SEBI's new rules [2]:

  • minimum application of 2 lots;
  • minimum allottees raised from 50 to 200;
  • OFS capped at 20% of the issue;
  • promoter lock-in raised from 3 to 5 years;
  • general corporate purpose use capped at 10% of the issue or ₹10 crore, whichever is less.

• Minimum public shareholding: a listed company must eventually have at least 25% public shareholding. In 2025-26 SEBI brought in a six-tier structure based on post-issue capital. Very large companies can now float smaller IPOs and get longer timelines to reach 25% [1].

• Start-up IPOs: in 2025-26 SEBI eased IPO rules for start-ups that are "reverse flipping" (moving their holding company back to India from abroad). For example, founders who become promoters can keep ESOPs (employee stock options) granted at least one year before the DRHP [1].

Don't confuse with

• Follow-on Public Offer (FPO): an IPO is a company's first public issue. An FPO is a public issue by a company that is already listed. Example: the Adani Enterprises FPO of ₹20,000 crore, withdrawn in 2023.
• Offer for Sale (OFS) through the stock exchange (2012): this sells only existing shares through a special exchange window. No new money reaches the company. It is the main route for disinvestment. An IPO can include a fresh issue.
• Secondary market: an IPO happens in the primary market, where money goes to the issuer. In the secondary market, investors trade existing shares among themselves, and the company gets nothing.
• Rights issue / QIP (Qualified Institutional Placement): a rights issue offers shares only to existing shareholders. A QIP (2006) offers shares only to QIBs. An IPO is open to the general public.

Prelims Hooks

• The RHP gives the price band but not the final price or the number of shares. The final prospectus gives both.
• Book building: cap ≤ 120% of floor (floor ₹100 → cap at most ₹120). Retail investors can bid at the cut-off price.
• Main-board split: QIB up to 50%, NII at least 15%, Retail at least 35%. Retail means bids up to ₹2 lakh.
• Anchor investors: up to 60% of the QIB portion, given shares one day before the IPO opens. Lock-in is 30 days on 50% and 90 days on 50%. The reserved share is 40% (33.33% mutual funds + 6.67% life insurers and pension funds) [1].
• Timeline: ASBA 2008 (mandatory 2016) → UPI 2019 → T+3 listing mandatory from December 2023.
• Green shoe = up to 15% extra shares for price stabilisation. GMP is unregulated, so it falls outside both SEBI and the exchanges (a common trap).

Mains Points

• From bank-led to market-led financing. India had a record 366 IPOs raising ₹1.88 lakh crore in 2025-26 and 30% of global IPO listings in 2024 [1][3].
• Firms borrow less from banks → banks face less asset-liability mismatch (lending long-term money that comes from short-term deposits).
• Household savings move into productive capital, which links to financialisation of savings (people shifting from gold and property into financial assets) and SIP flows.

• The reserved anchor quota for mutual funds, insurers and pension funds places domestic money beside FPIs. This makes IPOs less exposed to sudden foreign outflows [1].

• Investor protection vs ease of raising capital. The SME IPO boom and fund diversion to shell companies show the risk of light rules [2].

• SEBI responded with a 2-lot minimum, a 20% OFS cap and a 5-year promoter lock-in [2].

• The trade-off: stricter rules may shut out genuine small firms that need finance.

• Retail protection in the fintech era. ASBA, UPI and T+3 have cut cost and waiting time for investors.

• But GMP and social-media tips drive heavy oversubscription and listing-day speculation.
• The Adani FPO withdrawal (2023) shows that disclosure quality and credible anchors matter more than subscription numbers.

Related concepts

• Primary market
• Red herring prospectus
• Book building
• Anchor investor
• Qualified Institutional Buyer
• Application Supported by Blocked Amount
• Green shoe option
• Underwriting
• Grey market premium
• Follow-on Public Offer

Read more

• Primary market: raising equity capital