Initial Public Offering (IPO) is the way an organisation goes public, lists itself on the exchanges and sells share to raise capital. In other words, it is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the respective stock exchange.

Initial Public Offering (IPO) Definition | How to Invest in an IPO | types,process,subscription

**Why does a company offer an IPO?

1) Offering an IPO is a revenue-generating exercise. Every company needs money, it may be to expand, to improve their business, to improve the infrastructure, to repay loans etc.

2) A company going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride of any company.

3) For a desiring market, a public company can always issue more stocks. This will cover the way to acquisitions and mergers as the stocks can be issued as a part of the deal.

**Common terminology

When it comes to IPOs, these are some of the technical terms used that you should be familiar with:

a) Primary market – Shares offered in the IPO. Capital goes to the company’s trunk which is used by the company for stated purposes.

b) Secondary market- Day to day trading on the share market between public entities. Doesn’t add to the company’s capital since this is between individual sellers and buyers.

c) Qualified institutional buyers – Financial organizations with expertise and financial muscle which bid on IPOs.

d) Oversubscription – A situation where the number of bids outstrips the number of shares offered. This is common with popular and publicizes companies.

e) Red herring prospectus – A public document published by the company seeking bids for IPO.

f) Equity IPO – If equity is offered in the IPO.

g) Float – Amount of shares in circulation  (amount held by the public).

h) Flipping – Selling shares bought in the IPO on the first day of trade.

i) Secondary offering – New stock offered later on to the public after the IPO.

j) Bond/Debt IPO – If it is bond/debt that is sold in the IPO to raise capital.

k) Underwriter – The institution in charge of conducting the IPO proceedings at the instruction of the company.

l) Issue price – Price fixed for one share of the traded company.

**Types of IPOs

Primarily there are two types of IPOs. A company gets a push when people start buying their equities. The two basic types of IPOs are

*Fixed Price Issue

In a Fixed Price Issue, the price of the offerings is assessed by the company along with their underwriters. They evaluate the company’s assets, liabilities, and every financial aspect. They then work on these figures and fix a price for their offerings. The price is fixed after considering all the qualitative and quantitative factors.  

In a fixed price issue, the fixed price may be undervalued during the company’s IPO. The price is mostly lower than the market value. As a result, investors are always very interested in fixed price issue and ultimately revalue the company positively.

*Book Building Issue

It is a comparatively new concept in India compared to other parts of the world. In a book building issue, there is no fixed price, but a price band or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. 

You can bid for the shares with the desired price you would like to pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand for the share is known after each day as the book is built.

**Process for Initial Public Offering (IPO) 

  • A well established private company decides to raise capital through an IPO.
  • The company signs an underwriter, usually a consortium of investment banks which assess the company’s financial needs and decide the price band(the price of one share) of shares, number of shares to be offered etc.
  • Further, the underwriter participates in the drafting of the application to SEBI for approval with details of the company’s past financial records including profits, debts/liabilities, assets and net worth. Besides, the draft mentions how the funds to be raised will be used.
  • SEBI carefully scrutinises the application and after making sure that all eligibility norms are fulfilled, it gives the company a green signal to release the ‘red herring prospectus’.
  • The ‘red herring prospectus’ is a document released by the company mentioning the number of shares and the issue price/price band to be offered in the IPO. It also has details of the company’s past performance.
  • In what is called a ‘Roadshow’, executives travel to meet with and chase potential investors to buy their company’s shares.
  • An IPO opens and can last for 3-21 days, though it is usually open for 5 days.
  • For the time being, retail investors can bid for stocks through their banks/brokerages via the Internet. Learn how to buy an IPO.

Eligibility norms required to invest in an IPO

Anyone who is an adult and is capable of entering into a legal contract can serve the eligibility norms to apply in the IPO of a company. However, there are some other inevitable norms an investor needs to meet. The eligibility criteria are:

  • It is required that the investor interested in buying a share in an IPO has a PAN card issued by the Income Tax department of the country.
  • An individual need to have a valid Demat account.
  • No need to have a trading account, a Demat account serves the purpose. However, in case an investor sells the stocks on listings, he will need a trading account.
  • It is often advised to open a trading account along with the Demat account when an investor is looking forward to investing in an IPO for the first time.

**IPO subscription procedure

  • Assure that the IPO is open to retail investors.
  • IPOs are accessed through banks and brokerages that have undertaken to conduct the IPO proceedings on behalf of the company.
  • You can bid for shares from an IPO either online or offline
  • For offline bids, individual should fill in the specific application form available with banks and brokerages, given that they open up an IPO to their clients.
  • Attach a cheque for the number of shares you’re bidding for. You need to have a Demat account to bid for shares.
  • You can bid online through the bank/brokerage’s website. Payment for the bid can be made through net banking options.
  • After the bid, shares will be allotted to you in full or divided up among bidders in case of oversubscription.
  • The shares will be credited to your Demat account and a refund is made for the unsuccessful bids.

**Types of investors

*Retail individual investors (RII)

  • These investors can not apply for more than Rs 2,00,000.
  • Resident Indian Individuals, NRIs and HUFs who apply for less than ₹2 lakhs in an IPO under RII category.
  • Not less than 35% of the Offer is reserved for RII category.
  • RII category is permitted to bid at cut-off price.
  • They are permitted to withdraw their bids until the day of allotment.
  • Allotment: If an IPO doesn’t get over-subscribed in RII Category, full allotment to all applicants.If IPO is oversubscribed in RII category. For small over-subscription, each successful applicant would first be allotted 1 lot of shares and the balance shares shall be allotted proportionately the over-subscription is so large that each successful applicant cannot even be allotted 1 lot of shares, then 1 lot is allotted by lucky draw using a computer.

*Non-institutional investors (NII)

  • Individual investors, NRI‘s, companies, trusts etc who are biding for more than Rs 2 lakhs are known as Non-institutional bidders.
  • High Net-worth Individual (HNI) who applies for over ₹2 Lakhs in an IPO falls under this category.
  • Resident Indian individuals, Eligible NRIs, HUFs, companies, corporate bodies, scientific institutions, societies and trusts who apply for than ₹2 lakhs of IPO shares fall under NII category.
  • They are permitted to withdraw their bids until the day of allotment.
  • NII doesn’t have to register with SEBI.
  • Not less than 15% of the Offer is reserved for NII category.
  • NII’s are not eligible to bid at cut-off price.
  • An allotment is Proportionate. For example, if the IPO is subscribed 100 times in NII category, investors who applied for 100 shares will get 1 share.

*Qualified Institutional Buyers(QIB)

  • Financial Institutions such as Banks, FII’s, Insurance Companies and Mutual Funds who are registered with SEBI are called QIB’s. They usually apply in very high quantities.
  • 50% of the Offer Size is reserved for QIB’s
  • QIB’s are not eligible to bid at cut-off price.
  • QIB’s are prohibited by SEBI guidelines to withdraw their bids after the close of the IPOs.
  • The allotment is Proportionate.


Oversubscription is the condition when the number of shares offered to the public is less than the number of shares applied for.

Consider a company comes up with an IPO that offers 10 lakh shares to Retail Investors and 20,000 investors apply for 100 shares each – the total requirement here is 20 lakh shares whereas there are only 10 lakh shares available. Hence the issue is said to be oversubscribed by 2 times in the Retail Investor segment.

In case of an IPO, shares are sold in lots and not individually. Suppose the shares are sold in lots of 16, an investor has to bid for shares in multiples of 16 depending upon one lot or the multiple lots.

Oversubscription almost always occurs in the category of shares set aside for retail investors. Usually, companies make an effort to ensure that every bidder gets at least 1 lot of stock. Then, the remaining lots can be divided among bidders proportionate to the number of lots they’ve bid for. If this is not possible, allotment is done by way of a computerised draw of lots.

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