What is an IPO and how does it work?

A private company usually goes public for one or more of these reasons:

• To raise money. New shares are sold and the money goes to the company, for example to repay debt, build a factory or fund growth. This is called a fresh issue.
• To let existing shareholders sell. Founders, private equity funds or other early investors may sell some of their shares in the offer. This is called an offer for sale, and the money goes to the sellers, not the company.
• To get a market price and a wider shareholder base. Listed shares can be bought and sold daily, which makes it easier to value the company, to reward employees with shares and to raise more money later.

Many IPOs are a mix of both. The offer document states how much is a fresh issue and how much is an offer for sale, and it is shown on the Offer details tab of every IPO on this site. It matters, because an IPO that is mostly an offer for sale puts little or no new money into the business.

An IPO follows a fixed path, set by the market regulator SEBI. The dates change from IPO to IPO but the order does not.

1. The draft offer document (DRHP) is filed with SEBI. It describes the business, the finances, the risks and the plan for the money. SEBI reviews it and may ask for changes.
2. The final offer document (RHP) is published. It carries the final details, including the price band and the dates. The RHP is the document to read before you apply.
3. The price band is announced. For a book-built issue the company sets a lower and an upper price, and the final issue price is decided within that band after the bids come in. SEBI's rules limit how wide the band can be: the upper price can be at most 20% above the lower price.
4. Anchor investors bid first. On the working day before the issue opens, large institutions are allotted a part of the shares. See IPO investor categories.
5. The issue is open for bidding, usually for three working days. Retail and other investors place their bids in this window. The subscription figures show how many times the shares on offer were bid for.
6. The basis of allotment is finalised. If the issue is oversubscribed, not everyone gets shares. See how the allotment lottery works.
7. Money is released and shares are credited. Bids that are not allotted are unblocked, and allotted shares reach demat accounts.
8. The shares list. Trading starts on the exchange. See what happens on listing day.

Under SEBI's timeline, if T is the last day of bidding, allotment is finalised on T+1, shares are credited and unallotted money released on T+2, and the shares list on T+3. Weekends and exchange holidays are not counted.

Most Indian IPOs use book building. The company and its bankers fix a price band, then investors bid within it. When bidding closes, the final price, called the issue price or the cut-off price, is chosen based on the demand in the book. Retail investors normally bid at the cut-off price, which means they agree to pay whatever the final price turns out to be, up to the top of the band. The money blocked in the account is worked out at the top of the band, and anything above the final price is released.

Shares are bid for in lots, not one by one. The lot size and the price band decide the minimum amount you need. Lot size, price band and minimum investment explains the arithmetic.

Any resident individual with a PAN, a demat account and a bank account can apply. Applications are grouped into categories, and each category has its own share of the issue and is allotted in its own way:

• Retail investors, whose bid is up to ₹2 lakh.
• Non-institutional investors (NII, also called HNI), whose bid is above ₹2 lakh.
• Qualified institutional buyers (QIB), large institutions such as mutual funds, insurers and foreign investors.

A few issues also set aside a small quota for employees or existing shareholders. The split for each IPO is in its offer document.

• An IPO is not a guaranteed gain. Some IPOs list well above the issue price and some list below it. How an IPO listed in the past says little about the next one.
• Applying does not mean you get shares. In an oversubscribed issue many applicants get nothing. Your money is only blocked while you wait, not spent.
• GMP is not the listing price. The grey market premium is an unofficial indication. See what GMP is and how to read it.
• Read the offer document. The business, the finances, the use of the money and the risk factors are all there. Our IPO pages put the main figures from it in plain language, and the original is linked on each page.