Initial Public Offering (IPO) - A Complete Guidance In 2024

Table of Contents

What is an IPO

An IPO or Initial Public Offer, in simple terms, is an offer by a company to the general public, to subscribe to company’s equity shares. The offer is made by a private company to the public for the first time, hence it is known as initial offer. A privately held company invites potential investors to invest in the company by becoming its shareholder.

An IPO is an important milestone for any company as it raises capital from the public for the first time and transitions from a privately held company to a public entity.

An IPO is an opportunity for the general public to buy a small part of the business by purchasing its equity shares. Through an IPO, the private investors in the company get an opportunity to exit their holdings, if they wish so, and make returns on their investment.

How an IPO works

When a business is initially set up, it is funded by the owners or founders, and private investors. Capital requirement is fulfilled through promoters’ initial capital, debt, private funding through friends, family, well wishers and small shareholders etc.

As the business grows, business needs funds which can be sourced through large private investors like angel investors, professional investing bodies and venture capital. Capital mobilization through these resources is constrained beyond a point due to limited numbers of private investors and amount of funds they can bring.

After a stage when the business achieves scale and profitability, it requires a much higher quantum of funds for further growth. IPO opens the door for the company to acquire funds from a large number of investors in return of equity shares and promise of growth and return in future.

After the IPO, the stocks of the company are listed on stock exchanges and anyone can trade shares freely.

Apart from access to funds, being listed on stock exchanges also boosts a company’s overall credibility. Not every company is eligible to announce an IPO and raise funds. Regulator has certain criteria to be met before a company can sell shares to public. This brings transparency and accountability to any business, which helps it to mature and grow further.

History of IPO

The earliest mention of IPO is believed to be from the Roman Republic era when shares were held by legal bodies and they sold them to public in a physical market place where the value of the shares fluctuated and were speculated upon.

In recent history, the Dutch East India Company (VOC) came out with its first ever IPO in 1602. There was no minimum or maximum investment limit but potential investors had the choice to decide how much to invest.

This was first of a kind offer by any company in shipping/trading business to invite general public to invest, a process that was otherwise limited to few known private investors only. Initially the charter asked for 10 years of lock in but later allowed for holding to be transferred. The IPO attracted over 1100 investors. So, IPO’s history dates back to 400 years!

The IPO Process

For any company to plan an IPO, there are eligibility norms stated by the market regulator SEBI.

Before announcing an IPO, an eligible company need to initiate few important steps:

Appoint an Underwriter

For any IPO issue, a company needs to appoint an underwriter, usually an investment bank or financial institution.

Underwriter is an approved intermediary that evaluates a company, its financials, and works closely with issuer in assessing fund to be raised, type of issue, pricing, risk factors, prepare the prospectus, ensure regulatory compliance and aim for a successful IPO.

Register for IPO

Here, the issuing company registers with the regulator for IPO along with mandatory disclosures, detailed DRHP (Draft Red Herring Prospectus) and other documents, as per guidelines. Once the regulator approves the submission, the IPO date is announced.

Prior to IPO date, RHP (Red Herring Prospectus) is filed with SEBI and ROC (Registrar of Companies) containing the recent information about the company. After SEBI’s approval, the company has to apply to the stock exchange for the IPO.

IPO Roadshows

Before the IPO goes live, any IPO bound company can market the issue to potential investors through media and other channels. The idea is to create awareness and attract the public by highlighting what the company does and why investors should allocate their hard earned money to the issue.

IPO Pricing

An IPO can have fixed pricing or book built issue. In book built issue, the company arrives at a price band for bidding. The bid is open for a few days during which investors can revise their bid or even withdraw their application.

After the bidding process is over, the issuer announces the final cut off price according to the highest bids received. Finally, shares are allotted to investors. In case an IPO is oversubscribed, a partial allotment is concluded.

Pros and Cons of IPO

Pros and Cons of IPO for a Company

Pros: IPO is a route for a business to access the widest pool of funds from potential investors. An IPO also builds credibility for a business, its capabilities, transparency and prospects.

Moreover, going the IPO route also ensures the company cleans up the house for regulatory compliance, periodic reporting and accountability to the regulator and wider public. These factors benefit the business and its growth.

Cons: In terms of disadvantages for a company going the IPO way, IPO process involves expense right from hiring underwriter, marketing and operational expenses. The volatility factor also puts day-to-day pressure on the company management if the stock price is below market expectations after the IPO.

Sometimes markets ignore the fundamentals and stock movement is based on hype or sentiment. Also, companies become answerable to shareholders in decision-making, while promoters could make unpopular but visionary business decisions in a privately held business.

Pros & Cons of IPO for Investors

Pros

Potential for High Returns

IPOs are popular among stock market investors as they offer potential for attractive returns. An IPO allows an early phase business the required cash flow to fuel its expansion. Through an IPO, investors can grow their wealth along with the company’s upward growth path.

Unique Segments

One of the primary reasons investors are attracted to IPOs is the 'first mover advantage' they offer into new and innovative sectors. Often new success stories emerge from totally innovative sectors like tech, AI, Green energy etc. These companies tap primary markets to access funds.

Thus investors who get in early can capitalize on completely new business segments that can grow exponentially in future.

Diversification Opportunities

Investing in IPOs provides an opportunity for diversification, one of the golden rules of investing. With companies from different sectors frequently going public, IPOs offer investors a chance to invest in a wide range of industries.

Regulatory Safeguards

IPOs in India are strictly regulated by the Securities and Exchange Board of India (SEBI). This ensures that companies comply with stringent disclosure norms before they can access funds from the public, adding a layer of safety for the investors.

Cons

Lock-In Period

Sometimes, an IPO investment may have a lock-in period for specific categories of investors. During the lock in phase, investors are not allowed to sell their allotted IPO holdings.

The market condition, company’s performance or any external factor can cause the share price to fall during the lock-in phase. This may result in a loss for the investors when they intend to sell shares after lock-in is over.

Unpredictability

There is no way to determine the demand for an IPO or how the share will be received in the market despite an initial buzz or lackluster public interest. The market volatility during the listing phase can also impact a stock’s price. Hence, an IPO can be a risky investment, especially in the short term.

Public Information

Since a stock is not listed, there is no performance history available. A private company may only have limited information about its business, financial data, past track record, and negative events available in public space. This can make it difficult for investors to analyse a company's future performance.

Marketing Hype

Most IPOs create a marketing hype around the issue, and IPOs being a limited period offer, can create an urgency to invest. It is important for investors to carefully read the company’s prospectus and not fall for the marketing hype or the FOMO (Fear Of Missing Out).

IPO Alternatives

There are alternatives for companies to arrange funds for expansion other than IPO.

Private Equity or Venture Capital

Private Equity and VC firms are professional investing firms that buy stakes in startups or early growth phase companies. They also help the business with strategic business advice, industry contacts, domain expertise, flexibility and support.

Private Placements

Companies offer shares to a group of institutional or private investors, instead of going public. These investors may bring business expertise and strategic industry knowledge to assist the business, which retail or other investors can not offer.

M&A

Companies can merge with or acquire other similar businesses and have access to a larger pool of funds or resources instead of going public.

Investing in an IPO

Investing in an IPO is a simple process. Investors can login to their trading accounts, go to the IPO section and within a few seconds invest in any IPO. Invest in any IPO by simply logging into Rupeezy app and navigating to the IPO section.

There are a few points to consider before investing in IPOs:

IPOs are equity investments and carry the same risk of volatility as any other market investment. One must weigh risk appetite, time horizon of holding, financial goals before investing in IPOs.
Investors must read through the Red Herring Prospectus of the company before investing. Prospectus contains important details about the business, its customers, markets, key competitors, industry overview and potential, financial performance, key performance metrics, strengths, risks and details about the management team.
Investors must assess the IPOs valuation by comparing it with industry peers to understand if the issue is priced reasonably or high.
It is important to understand the objective of an IPO and how funds will be utilized. Whether the IPO corpus will be deployed for growth and expansion, or paying off debt will determine how investors’ money will be put to use, if it will help in business growth.

Performance of an IPO

Some of the top IPOs in India have collected large quantum of funds in recent times.

Top IPOs	Issued IPO Amount	Date Issued
LIC IPO	21,000 Cr	May 2022
Paytm IPO	18,300 Cr	Nov 2021
Coal India IPO	15,200 Cr	Oct 2010
Reliance Power IPO	11,700 Cr	Jan 2008
SBI Life IPO	10,341 Cr	Sept 2017
GIC IPO	11,372 Cr	Oct 2017
ONGC IPO	10,530 Cr	Mar 2004
DLF IPO	9,187 Cr	Jun 2007
Zomato IPO	9,375 Cr	Jul 2021

How to apply for an IPO

To apply to an IPO, it is mandatory to have a demat account. Open a demat account today, no account opening fee, no other charge to invest in an IPO.

Different types of an IPO: SME IPO

Within the IPO category, there is a specific type of IPO known as SME IPO. SME IPOs are meant for small and medium sized companies raising funds from the public for the first time. SMEs are the backbone of Indian economy contributing 8% of GDP, 40% of industrial output and exports and generate 40% of jobs.

Government in an effort to boost SME segment, has created SME IPO platform. SME IPOs are listed on NSE Emerge and BSE SME while regular IPOs are listed on BSE and NSE. The size of IPO is smaller compared to a Mainboard IPO. The minimum number of allottees in SME IPO is 50 against 1000 in regular IPO.

The ticket size for investment in SME IPO is minimum Rs 1 lakh for 1 lot. Shares can be sold only in lots sizes, and not individually. The reporting requirements for companies listed on SME platforms is half yearly instead of quarterly.

SME IPOs carry higher risk and also potential for higher growth from new businesses in the early stage and exploring new and innovative concepts which can give exponential returns in future. Investors must do their research on company’s business fundamentals, financials before investing in SME IPOs and not invest on tips.

Historical returns in an IPO

Let us look at some of the IPOs in recent years that have delivered stellar returns

Name	Listing Date	Issue Price Rs.	Listing Price Rs.	Current Price (Nov ‘23)	% Gain from Issue Price
Polycab India Limited	16 Apr 2019	538	663	5124	852%
Rail Vikas Nigam Limited	11 Apr 2019	19	19	160	746%
Mrs Bectors Food Specialities Limited	24 Dec 2020	288	501	1203	314%
Mazagon Dock Shipbuilders Limited	12 Oct 2020	145	216	1992	1273%
Paras Defence and Space Technologies Limited	1 Oct 2021	175	475	714	308%
Kalyan Jewellers India Limited	26 March 2021	87	73.9	347.9	300%
Insolation Energy Limited	10 Oct 2022	38	76.1	608	1500%
Kaynes Technology India Limited	22 Nov 2022	587	775	2476	321%
Bondada Engineering Limited	30 Aug 2023	75	142	369	393%
Plaza Wires Limited	12 Oct 2023	54	84	121	125%

Conclusion

To conclude, an IPO is an attractive investment opportunity for equity investors to participate in growth of a company in early stages. Investing in any IPO is a simple and easy process. It is important to read the company’s prospectus and understand the business, its financial health and prospects. Invest in upcoming IPOs here.

FAQs

What is IPO in stock market?

An IPO or Initial Public Offer is the process when a privately held company sells its equity shares to general public for the first time. IPOs in the stock market are regulated by SEBI.

A company may raise funds for its expansion, working capital requirements, debt repayment, dilute promoter ownership etc by going public. Shares are listed on stock exchanges after IPO and from thereon, they can be traded.

How to check IPO allotment status?

IPO Allotment Date is mentioned in every IPO issue. Once the allotment is done on the mentioned date, investors can check the status on IPO registrar’s website using your PAN number. After allotment, investors receive intimation from stock exchange and depository through email and SMS.

What is IPO cycle?

IPO cycle refers to the entire process a company goes through while going from a private ownership to a public company phase. Before embarking on an IPO, the company must prepare itself by evaluating the business, financials, valuation, offer terms etc and onboard an underwriter to manage the entire process.

Company prepares a draft prospectus and applies to SEBI with statutory documents.

What is SME IPO?

SMEs are Small and Medium Enterprises, relatively smaller in size and businesses that may be in the early stages of growth. Small companies have a turnover up to Rs 50 crores and Medium enterprises have Rs 50 to 100 crores turnover.

SME companies raise funds through SME IPOs. These are listed on separate exchanges known as NSE Emerge and BSE SME. SME IPOs are not listed on BSE and NSE as the mainboard IPOs are. SME IPOs are smaller in size, the application amount is minimum one lakh or more for one lot, the shares can be sold as entire lots only after listing.

The minimum number of allottees required in SME IPO is 50. The reporting requirement for SME companies is half yearly instead of quarterly. One can invest in SME IPOs through their demat and trading account, there is no separate process for applying to SME IPO.