IPO Explained: Meaning, Process, Types & Key Terminology

An Initial Public Offering (IPO) is one of the biggest milestones in a company’s growth. It converts a private company into a public one and allows general investors to participate in ownership. Although IPOs frequently appear in financial news, many people do not fully understand what they are, how they work, and why companies choose to go public.

This detailed article explains IPOs in simple language, covering definitions, terminology, purpose, types, process, and everything that happens before and after listing.

What Is an IPO ?

An IPO (Initial Public Offering) is a process through which a private company issues its shares to the public for the first time and gets listed on a recognized stock exchange such as NSE or BSE.

Before an IPO:

• The company is owned by founders, early investors, and private institutions.

After an IPO:

• Shares become available to retail investors, institutions, and the general public.
• Shares can be traded freely in the stock market.

In simple terms, an IPO is the gateway for a company to enter the stock market.

Why Do Companies Launch an IPO ?

1. Raise Capital for Growth

Companies need funds to:

• Expand operations
• Build new facilities
• Enter new markets
• Invest in technology and infrastructure

IPO helps companies raise large amounts of capital without taking loans.

2. Provide Exit to Early Investors

Venture capitalists, private equity, and angel investors can partially or fully exit their investments.

3. Improve Brand Credibility

A listed company gains transparency, media attention, and trust from customers and partners.

4. Use Shares as a Strategic Tool

Public companies can use their shares for:

• Acquisitions
• Employee stock options (ESOPs)
• Strategic collaborations

5. Strengthen Corporate Governance

Public companies must follow stricter regulations, improving accountability.

Important IPO Terminology

DRHP (Draft Red Herring Prospectus)

A preliminary document submitted to SEBI.
It includes details about:

• Business model
• Financial performance
• Risks
• Promoters
• Fund usage

This is not the final version.

RHP (Red Herring Prospectus)

The final document shared after SEBI approval. It includes the confirmed issue size, price band, and other final data.

Issue Size

Total amount of money the company wants to raise through the IPO.

Issue Price / Offer Price

The final price at which shares are allotted to investors.

Price Band

A price range within which investors can place bids in a book-building IPO.

Face Value

The nominal value of a share, typically ₹1, ₹2, ₹5, or ₹10.

Lot Size

The minimum number of shares that investors must apply for in an IPO.

Oversubscription

When demand for shares is higher than the total available shares.

Listing

The event when the shares start trading on the stock exchange.

Listing Price

The price at which shares debut on the stock exchange.

Anchor Investors

Institutional investors who invest a day before the IPO opens to build confidence and stability.

Investor Categories: QIB, NII, RII

• QIB: Qualified Institutional Buyers
• NII: Non-Institutional Investors
• RII: Retail Individual Investors

Each group receives a fixed quota.

ASBA (Application Supported by Blocked Amount)

A process for applying to IPOs without immediately deducting money. The amount remains blocked until allotment.

Allotment

The process of distributing shares among investors.

Types of IPOs

1. Fresh Issue

A company issues new shares to raise capital.
The funds go directly to the company.

2. Offer for Sale (OFS)

Existing shareholders sell their shares to the public.
The funds go to the selling shareholders.

3. Combined Issue

Most IPOs today include both:

• Fresh Issue
• Offer for Sale

How an IPO Works: Step-by-Step Process

Step 1: Decision to Go Public

The company’s board approves the IPO plan and appoints merchant bankers to manage the process.

Step 2: Due Diligence and Documentation

Bankers evaluate financials, legal compliance, and company operations. They prepare the DRHP.

Step 3: Filing DRHP with SEBI

SEBI reviews the document, asks questions, and may suggest modifications.

Step 4: Roadshows and Marketing

Company management presents:

• Strategy
• Financials
• Business vision
  to institutional investors to generate interest.

Step 5: Setting the Price Band

Merchant bankers and the company decide the range after evaluating market conditions and valuation metrics.

Step 6: Opening the IPO for Subscription

Investors apply through UPI or ASBA.
The subscription window usually lasts three days.

Step 7: Closing of Subscription

All bids are collected and analyzed.

Step 8: Price Discovery (for Book-Building IPOs)

The final offer price is determined based on investor demand.

Step 9: Allotment of Shares

Shares are allotted based on category rules.
Retail allotment is usually done by a lottery system when oversubscribed.

Step 10: Listing on Stock Exchange

Shares begin trading publicly on NSE or BSE, and the market determines the opening price based on demand.

IPO Methods

1. Book-Building Issue

• Most common IPO method
• A price band is given
• Investors bid based on perceived value
• Final price is discovered through demand

2. Fixed Price Issue

• A fixed share price is announced
• No bidding mechanism
• Less common today

Participants in an IPO

Company (Issuer)

The business offering shares to the public.

Merchant Bankers

Investment banks that manage the IPO process.

Registrars

Handle allotment and refund processes.

SEBI

Ensures investor protection and approves the IPO.

Stock Exchanges

Provide the listing platform.

Investors

Retail, institutional, HNIs, and foreign investors.

Pre-IPO and Post-IPO Concepts

Pre-IPO Placement

Companies sometimes allocate shares to institutions or wealthy individuals before the IPO at negotiated prices.

Lock-In Period

Promoters and key investors cannot sell their shares immediately after listing, ensuring stability.

Grey Market and GMP

Unofficial buying and selling of IPO shares before listing.
GMP (Grey Market Premium) is an indicator of expected listing price but is not regulated.

How IPOs Are Priced (Valuation Methods)

Peer Comparison

Companies are compared with similar businesses in the same sector.

Financial Metrics

Analysts study:

• Revenue
• Profit
• Growth
• EBITDA
• Assets

Market Conditions

Bull or bear markets affect valuation and pricing.

Investor Demand

High demand can push the final price toward the upper band.

What Happens After Listing?

Shares Start Trading Freely

The stock price is determined by demand-supply dynamics.

Increased Reporting Requirements

Companies must release quarterly results, follow governance rules, and maintain transparency.

Analyst Coverage

Brokerages and analysts start evaluating the company’s performance and future potential.

Advantages of an IPO for a Company

Large Capital Inflow

Helps in expansion and long-term growth.

Improved Public Image

Increases credibility and customer trust.

Better Corporate Governance

Enhances transparency and discipline.

Liquidity for Shareholders

Early investors and employees can monetize their holdings.

Challenges for Companies After IPO

Compliance Pressure

Public companies must follow strict regulations.

Market Expectations

Performance is constantly monitored by investors and analysts.

High Cost of Launching an IPO

Includes banking, legal, marketing, and regulatory expenses.

Conclusion

An IPO is a transformative event for any company, shifting it from private ownership to public participation. The process is detailed, heavily regulated, and involves multiple stakeholders. For companies, IPOs bring capital, visibility, and credibility. For investors, IPOs provide opportunities to become early shareholders of a newly listed company.

Understanding IPO terminology, processes, and the rationale behind going public helps investors follow market developments more effectively and make informed observations about the financial markets.