12. What is an IPO (Initial Public Offering), and how does it work?
An Initial Public Offering (IPO) is the process through which a private company sells its shares to the public for the first time to raise capital. Once listed on the stock exchange, the company becomes publicly traded, allowing investors to buy and sell its shares.
How Does an IPO Work?
Step 1: Company Plans for IPO
The company decides to go public to raise funds for expansion, debt repayment, or acquisitions.
Step 2: SEBI Approval & Draft Red Herring Prospectus (DRHP)
The company files a DRHP (Draft Red Herring Prospectus) with SEBI, detailing its financials, risks, and objectives.
Step 3: IPO Price & Subscription
The company sets a price band and invites investors to subscribe.
Investors can apply via UPI, ASBA (Application Supported by Blocked Amount), or online brokerage platforms.
Step 4: Share Allocation & Listing
If oversubscribed, shares are allocated via lottery-based allotment.
Once allocated, shares are listed on NSE & BSE, allowing trading.
Example:
LIC IPO (2022): Raised ₹21,000 crore, India’s largest IPO.
Zomato IPO (2021): Oversubscribed 38 times due to high demand.
Types of IPO Pricing
Type
Description
Fixed Price IPO
The company sets a fixed share price before the issue.
Book Building IPO
Investors bid within a price range to determine the final issue price.
Example:
Tata Technologies IPO (2023) used book-building pricing to maximize demand.
Why Do Companies Launch IPOs?
Raise Capital – Funds expansion, R&D, and debt repayment.
Increase Market Visibility – Gains credibility and attracts institutional investors.
Provide Liquidity to Shareholders – Allows early investors to exit with profits.
Key Takeaways:
An IPO is the first time a private company offers shares to the public.
Investors apply via ASBA or brokerage platforms before listing.
IPOs can be fixed price or book-building based on demand.
After listing, shares can be traded on stock exchanges like NSE & BSE.