What Is IPO in Stock Market – Full Form, Meaning, Process

An Initial Public Offering is the process of converting a private business into a publicly traded company, making its shares accessible to both everyday investors and institutional players.

But what leads a company to take this step? What does the process involve? And what should potential investors keep in mind before participating? This article explains the concept of an initial public offering (IPO) in detail. Find all the details, starting from IPO meaning to its process and working. So let’s dive in!

What is IPO in Share Market

IPO, which stands for  Initial Public Offering, is the process by which a private company offers its shares to the public for the first time by listing them on a stock exchange. This marks the company's transition from private to public ownership, which is often called going public

Features of IPO

Knowing the IPO full form and meaning is one thing. But to better understand an initial public offering, you must know the features, which are:

• First public sale of shares: It allows the investor to get the company’s shares for the first time. These are listed on stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).

• Regulated by SEBI: The IPO process is carefully regulated by SEBI (Securities and Exchange Board of India) to ensure transparency and protect investor interests. 

• Eligibility criteria: A company must meet some basic requirements to start with an IPO. These are the financial aspects. This is to ensure the company’s worth and standing. 

• Raising capital: IPO is launched with the aim of securing funds. The idea is to sell some shares of the company and raise money against them for business needs. 

• Prospectus filing: This is a primary document that the company must file. It includes all the details of the company that an investor must know.

• Share listing: Once everything is approved, the company's shares are listed. People can now place requests for allotment, and overtime trading can be done.

Hence, an IPO is a systematic process of raising funds from the market. It is regulated and allows companies to sell their shares to the public and secure funds in return.

Types of IPO

When a company decides to go public, it can choose from two main types of IPOs. The details of both types are given below:

1. Fixed Price IPO

Here, the company sets the price at which it wants to sell its shares. This is a fixed and exact price, which is also mentioned in the offer document. This allows the investors to know the amount they need to invest. To finalize this price, the company works closely with financial professionals, such as merchant bankers and underwriters.

One important thing to note here is that the company will know the subscription rate once the entire process is done. This method is simple and easy to understand. 

2. Book Building IPO

A Book Building IPO is more flexible and market-oriented. Instead of a fixed price, the company sets a price range. It is called a price band (for example, Rs. 200 to Rs. 270 per share). Investors place bids stating the number of shares they want. They also mention the price they wish to pay from the range. 

After the bidding period ends, the company decides the final price based on the demand and bids received. This method helps discover the market-driven price of the shares, making it more efficient for companies to raise the right amount of capital. Large companies usually go for this method. 

For a better and clearer understanding, here is a table for the difference between these two types of IPO:

The choice is based on the company. So, now that you know the basics, let us find out the process of IPO here.

How IPO Works

You must be wondering how does IPO work. This is a lengthy process. There are various steps that you must go through at once. So, here are the ones to know:

1. Appointment of Merchant Banker (Lead Manager)

The company appoints one or more SEBI-registered merchant bankers who manage the entire IPO process. The primary role of these managers includes:

• Completing the due diligence

• Preparing the documents as needed

• Gathering all information. Maintaining proper coordination between all parties.

2. Draft Red Herring Prospectus (DRHP) Submission and SEBI Approval

The company files the DRHP with SEBI. This will include the details linked to the business, finance, and risk. This document undergoes a detailed review process. Once satisfied, the grant is approved, and you can move ahead in the IPO process. 

Point to Note: SME IPOs do not require SEBI approval, but must be approved by the stock exchange.

3. IPO Application to Stock Exchanges

Once done with the approval, the banker moves ahead to apply. He submits the IPO application and DRHP to stock exchanges (NSE, BSE) for in-principle approval to list the shares.

4. Price Determination

The company and merchant bankers decide the pricing method:

• Fixed Price: A fixed share price is set and disclosed before the IPO opens.

• Book Building: A price band is set, and investors bid within this range. The final price is decided after bidding.

5. Red Herring Prospectus (RHP) Submission

An updated prospectus (RHP) is filed with the stock exchanges. It includes the latest financials, IPO timeline, and pricing details to help investors make informed decisions.

6. Roadshow and IPO Marketing

The company and merchant bankers conduct road shows and investor meetings in various cities to generate interest. Media and analysts are also engaged to promote the IPO.

7. IPO Opens for Anchor Investors

Qualified Institutional Buyers (QIBs), called anchor investors, can bid for shares before the public subscription opens, usually committing large amounts (minimum Rs. 10 crore).

8. IPO Opens for Public Subscription

The IPO is open for retail and institutional investors for a minimum of 3 days and up to 10 days. Investors apply through brokers or banks, submitting bids or applications.

9. Share Allotment

After the subscription closes, shares are allotted. The registrar verifies applications, ensuring bank and demat accounts match, rejects third-party applications, and allocates shares either by lottery or pro-rata in case of oversubscription. Funds are debited from investors’ accounts, and shares are credited to demat accounts.

10. Listing Date Announcement

Once the listing documents are submitted to the stock exchange, the company proceeds to obtain a credit confirmation from the depository indicating that the allotted shares have been successfully credited to investors' accounts. Following this, the stock exchange issues a listing circular on the next trading day. This circular provides key details including the final issue price, ISIN, stock code, and trading symbol.

11. Listing and Trading Begins

On listing day, a pre-open session (9:00 a.m. to 9:45 a.m.) determines the opening price through order matching. Normal trading starts at 10:00 a.m., allowing investors to buy and sell shares freely.

12. Post-Listing Compliance

The company submits ongoing disclosures such as board meeting notices, annual reports, audit reports, and governance documents to the stock exchange.

This entire process takes around 3 months to 1 year or more. A tentative timeline for the entire process is given below:

Advantages and Disadvantages of IPO

You know the IPO process. But is IPO good or bad? Well, this is a question that we need to answer. So, let us explore the pros and cons of the IPO over here.

Advantages of an Initial Public Offering

• Raising Capital: An IPO allows a company to raise substantial funds from the public, which can be used for business expansion, research and development, debt repayment, acquisitions, and other growth initiatives.

• Increased Visibility and Credibility: Going public improves the company’s brand image, prestige, and market visibility. This enhanced reputation can attract new customers, partners, and suppliers, and often makes it easier to obtain favorable credit terms.

• Liquidity for Shareholders: An IPO provides liquidity to early investors, founders, and employees by enabling them to sell their shares in the public market. It also allows companies to use their stock as currency for mergers and acquisitions.

• Attracting and Retaining Talent: Public companies can offer stock-based compensation (ESOPs), which helps attract and retain skilled employees by aligning their interests with the company’s success.

• Lower Cost of Capital: Access to public equity markets may reduce the company’s overall cost of capital compared to private funding sources.

Disadvantages of an Initial Public Offering

• High Costs: The IPO process is expensive, involving underwriting fees, legal, accounting, and marketing costs. Ongoing compliance and reporting requirements also add to the cost of being a public company.

• Time-Consuming and Distracting: Preparing for an IPO can take months or even years, requiring significant management time and effort. This distraction can lead to missed business opportunities and increased workload for employees.

• Loss of Control: Founders and original owners may lose control over company decisions, as public shareholders gain influence. Management must also focus on meeting short-term financial expectations, which may conflict with long-term goals.

• Increased Regulatory Compliance and Transparency: Public companies must disclose detailed financial and business information regularly, which can expose sensitive data to competitors and increase scrutiny from regulators and investors.

• Market Pressure and Volatility: Stock prices can fluctuate widely based on market sentiment, sometimes unrelated to the company’s actual performance. This volatility can create pressure on management and affect company valuation.

• Risk of IPO Failure: If market conditions are unfavorable, the IPO may be delayed or canceled after significant time and expense have been invested.

Who Can Invest in IPO

Many people can invest in an IPO. The only condition is that they must go through the SEBI guidelines and should also comply with them. So, based on the same, here are the key investors to know:

1. Individual Investors

These are retail investors or individuals looking to invest in share market. The primary conditions that they must meet to invest in the IPO are as follows:

• They must have a valid PAN (Permanent Account Number) issued by the Income Tax Department of India.

• A demat account with a linked bank account is needed.

There are no income restrictions for retail investors. Thai makes IPO accessible to all.

2. Non-Resident Indians (NRIs)

NRIs can also invest in Indian IPOs. For the same purpose, they must fulfill the following basic needs:

• They need to have an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account

• A valid PAN card and an NRI demat account linked to their bank account. 

Unlike some other investments, NRIs do not require a PINS-designated NRE account to apply for IPOs.

3. Institutional Investors

Qualified Institutional Buyers (QIBs) such as mutual funds, insurance companies, banks, foreign institutional investors (FIIs), and other registered entities can participate in IPOs. They typically receive a significant portion of the shares in large IPOs.

4. Other Entities

Companies, trusts, partnership firms, and other legal entities can also invest in IPOs, provided they have valid demat and bank accounts and comply with regulatory requirements.

How to Invest in IPO

Now that you know who can invest in an IPO, the next question is how to invest in one. So, as an individual investor, you would need to follow the steps below to invest in an IPO:

1. Open a Demat and Bank Account

To apply for IPO, you need an active demat account to hold shares electronically. It must be linked to a bank account for seamless transactions. You can open a demat account through platforms like Rupeezy and start your investment journey with ease.

2. Check IPO Details

Review the IPO prospectus to understand the company’s business, price band, lot size, and subscription dates. This information is available on stock exchange websites, broker platforms, and financial news portals.

3. Apply Through ASBA (Application Supported by Blocked Amount)

SEBI mandates IPO applications via ASBA, where your application money is blocked in your bank account but not debited until shares are allotted. You can apply through:

• Your bank’s net banking

• Your broker’s online IPO platform

• Mobile apps provided by your bank or broker

4. Fill and Submit the IPO Application

Enter your demat account number, PAN, number of shares (or lots), and bid price (if applicable). For book-building IPOs, you can bid within the price band. Submit your application during the IPO subscription window (usually 3–7 days).

5. Wait for Allotment

After the IPO closes, shares are allotted based on demand. If oversubscribed, allotment is done by lottery or proportionally. Allotted shares are credited to your demat account; if not allotted, the blocked amount is released.

6. Start Trading

Once shares are credited, they are listed on the stock exchange, and you can buy or sell them as you wish.

How to Analyze an IPO Before Applying

Investing in an IPO is a big decision. There are so many options, and you need to pick the one that suits you. But how do you know which IPO is better for you to invest in? Well, for this, you would need to check certain points like below:

1. Understand the Company Fundamentals

Start by studying the company’s business model, revenue sources, and operational framework. Review the prospectus carefully to understand what the company does, its competitive advantages, and how sustainable its business is over the long term.

2. Examine Financial Performance

Analyze key financial metrics such as revenue growth, profit margins, net profit, cash flow, and debt levels. Consistent growth and profitability indicate stability, while high debt or irregular cash flows may signal risk. Also, compare these figures with industry peers to assess relative strength.

3. Evaluate Industry Position and Market Potential

Consider the company’s market share, competitive landscape, and growth prospects within its industry. A company with a strong position in a growing sector is more likely to succeed. Look at industry trends and demand drivers that could impact future performance.

4. Assess the Management Team

The experience and track record of the company’s leadership are crucial. Evaluate the background of key executives and their ability to execute business strategies effectively. Strong, credible management often translates into better company performance.

5. Analyze IPO Valuation and Pricing

Check if the IPO price is reasonable by comparing valuation multiples like PE ratio, Price-to-Book (P/B) ratio, and Enterprise Value to EBITDA with similar listed companies. Overpriced IPOs may offer limited upside, while undervalued ones could be attractive investments.

6. Understand the Purpose of the IPO Funds

Review how the company plans to use the proceeds from the IPO. Using funds for expansion, debt reduction, or new projects is generally positive. Conversely, unclear or inefficient use of funds can be a red flag.

7. Consider Market Conditions and Sentiment

Broader market trends, economic stability, interest rates, and investor sentiment affect IPO performance. Bullish markets tend to favor IPO success, while bearish conditions may dampen demand.

8. Review Lock-in Period and Regulatory Disclosures

Check the lock-in period for promoters and early investors, which prevents immediate selling post-IPO, helping stabilize prices. Also, ensure all regulatory disclosures are transparent and complete.

Key IPO Terms to Understand

Conclusion

You must now know what IPO stands for and why it is important. It marks a crucial step in a company’s journey, from being privately held to becoming publicly invested. For businesses, it’s a way to raise capital, increase visibility, and accelerate growth. For investors, it offers early access to promising companies, along with associated risks.

Whether you are a curious learner or a potential investor, understanding the basics of an IPO helps you make informed decisions and follow the market more confidently.

FAQs

1. Can a company withdraw its IPO after announcing it?

Yes, a company can withdraw its IPO before the allotment if market conditions turn unfavorable or if there isn’t enough investor interest. Regulatory bodies like SEBI allow companies to withdraw or defer IPOs in such cases. However, it reflects on market sentiment and may delay future fundraising plans.

2. What happens if an IPO is oversubscribed?

If an IPO is oversubscribed, demand exceeds the available number of shares. In such cases, shares are allotted through a lottery system in the retail category. For institutional and HNI investors, allocation follows regulatory guidelines. Oversubscription generally indicates high investor interest, but doesn’t guarantee listing-day gains.

3. Can IPO shares be sold immediately after listing?

Yes, retail investors can sell IPO shares as soon as they are listed and trading begins. There is no lock-in period for general investors. However, quick selling depends on listing price and market demand. Some categories, like anchor investors and promoters, do have a mandatory lock-in period.

4. Are IPOs safe for beginners?

IPOs can be rewarding, but they carry risks, especially for beginners. Since newly listed companies lack a trading history, prices can fluctuate sharply. Market sentiment, company valuation, and future performance all impact returns. It’s best to research thoroughly or consult a financial advisor before investing in an IPO.

5. What is a grey market in IPOs?

Grey Market Premium refers to the price at which IPO shares are traded unofficially before the listing. It gives a rough idea of market demand and expected listing price. However, GMP is not regulated, and it may not always reflect actual performance, so it should not be the sole factor in making investment decisions.