Home » What is an IPO? A Comprehensive Guide to Initial Public Offerings

What is an IPO? A Comprehensive Guide to Initial Public Offerings

by Brad

Initial public offerings (IPOs) were flooding Indian markets in 2024. Last year, 90 maiden companies raised ₹1.62 lakh crore through IPOs, with several big-ticket listings. An IPO is a monumental event in any company’s history, and the IPO juggernaut is expected to continue even in 2025. An IPO’s performance often impacts sectoral indices like Nifty, Sensex, Nifty Bank, etc., as the new company makes its place in the stock market when it debuts.

What is an IPO?

An IPO is when a company goes public for the first time. In other words, it offers its shares to the public for the first time, marking its move from a private company to a publicly listed firm. By going public, companies raise funds from various retail investors and deploy the capital raised for various purposes, such as expansion, debt repayment, equipment purchase, etc.

Types of IPO

There are two types of IPO, namely:

Fixed Price Offering

In this type of IPO, the price of shares offered to the public is predetermined and remains fixed throughout the process. Investors buy the shares at the same issue price, irrespective of market conditions.

Book-building Offering

In the book-building offering, share prices are determined through a bidding process. You can choose the amount you buy shares within a specific price band fixed by the company. The final share price is based on demand generated during the book-building period.

Why Does a Company Go for an IPO?

There are several reasons why companies opt for an IPO. These include:

Access to Capital

IPOs allow firms to raise funds from the public. Through them, companies can fuel their growth strategies, improve operations, expand, invest in R&D and improve operations.

Increased Visibility

After listing for an IPO, a company gains more visibility. This can go a long way toward earning recognition and trust, attracting customers and partners, and enhancing a firm’s trustworthiness.

Provides Liquidity for Existing Shareholders

An IPO allows existing shareholders to liquidate their stakes. Shares of a private company have limited liquidity and are relatively more challenging to buy and sell. However, when stocks are listed, shareholders can trade them easily.

Access to Capital Market

Through an IPO, a company gains access to broader capital markets, allowing it to explore various financial options. A firm can issue additional shares, bonds, and debt instruments post-IPO to catalyse its future growth.

The IPO Process

Going public involves several steps and processes. These include:

Merchant Banker Appointment

The first step is to select a merchant banker, aka underwriter. The bank guides a company through the IPO journey. A firm can choose a merchant banker based on its reputation, industry experience and size.

IPO Registration and Filing of DRHP With SEBI

The merchant banker scrutinises the company’s financial health, business model, and operational strategies, based on which it prepares the draft of the red herring prospectus (DRHP). DRHP contains crucial business details, financial information, strengths, risks, etc.

However, it does not include the number of shares offered or the share price. The DRHP is then filed with SEBI, which ensures it meets the regulatory requirements and has all the correct information. After SEBI approves it, the company fixes the IPO date.

IPO Roadshows

The next step is marketing the IPO to potential investors. To attract investors, the company conducts presentations in various cities. During these presentations, the company’s management explains the firm’s business model, growth prospects, and financial health.

Price Determination and IPO’s Bidding Period

After receiving feedback from roadshows, the company’s underwriters decide on the final share price. If demand is high, shares can be priced higher, and vice versa. After finalising the price, the company opens the IPO’s bidding period, during which you can place your bid for the number of shares you want within the price range the company sets. At the end of the bidding period, the company allocates shares to various categories of investors.

Listing of Shares

The shares are then listed on stock exchanges, such as BSE, NSE, or both. Once listed, their price fluctuates based on demand and supply. If you cannot get shares during the IPO, you can buy them once they are listed on the stock exchanges.

How to Apply for an IPO?

To apply for shares in an IPO, you need to open demat account. You also need a trading account. You can apply for an IPO once you have this account through the Application Supported by Blocked Amounts (ASBA) or United Payments Interface (UPI). The ASBA facility is available on your bank’s net banking, while the UPI process is available on your broker’s trading app.

While the ASBA and UPI are online processes to apply for an IPO, you can also apply offline. Fill out the IPO application form with the required details, including your PAN number, mobile number, DP account number, bank account, lot size, etc., and submit it to your broker with a cheque for the specified amount.

Important Things to Remember

You must remember certain vital things while applying for a company’s IPO. These include:

Your Financial Goals

Ensure the IPO fits your overall investing strategy and aligns with your financial goals such as listing gain, long-term investing strategy, exit plan etc.

Be Aware of the Risk Factors

Ensure you’re aware of the risk factors. Every company has specific risks, and it’s vital to be aware of them before applying. Make sure you’re comfortable with the risks. Go through the company’s RHP to understand the various risks involved.

Understand the Industry the Company Serves

Learn about the industry the company serves. Find out how the industry is expected to perform and how the company is positioning itself against its competitors.

Conclusion

While an IPO signals a company’s growth and potential, it’s an opportunity to participate in its success stories for investors. Investing in a company’s IPO with significant growth potential can go a long way in wealth creation. 

The HDFC SKY app makes participating in a company’s IPO easy. It offers information on current, upcoming, and closed IPOs. Get a Demat account with HDFC SKY and participate in IPOs on the go.

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