Curious about how companies go public? Discover everything you need to know about Initial Public Offerings (IPO) – from eligibility, the IPO process, and SEBI regulations, to how you can increase your chances of getting an allotment.
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Why Do Companies Go Public?
Every company begins as a private entity, often funded by its founders or a close-knit circle of investors. As the business grows and scales, it may attract funding from angel investors, venture capitalists, or private equity firms. But there comes a point when the company needs larger capital, beyond what private investors can provide.
This is when companies look toward the public markets for funding through an Initial Public Offering .
An IPO marks the first time a company offers its shares to the general public. It’s the official transition from a private company to a public one—a significant milestone in a company’s journey.
Why Companies Issue an Initial Public Offering (IPO)?
There are multiple strategic and financial motivations behind going public. Let’s break them down:
i) Raise Capital for Growth and Expansion
An Initial Public Offering enables a company to tap into a vast pool of public capital. The funds raised can be used to build new facilities, invest in technology, expand to new markets, hire talent, or even acquire other companies.
ii) Repay Existing Debt
IPO proceeds can also be used to clear loans and reduce financial burdens, which strengthens the company’s balance sheet and lowers interest costs.
iii) Exit Route for Early Investors
Angel investors, venture capitalists, and early backers often look for an “exit” to realise their returns. An Initial Public Offering provides that opportunity by allowing them to sell their shares to the public.
iv) Enhance Credibility and Public Image
Being listed on a stock exchange enhances the company’s reputation, attracts more business partnerships, and facilitates future fundraising efforts.
v) Employee Stock Options (ESOPs)
Public companies can offer stock-based incentives to employees, helping attract and retain top talent.
Also read : Investing for Beginners: A Step-by-Step Guide
Eligibility Criteria to File an IPO in India
Before a company can go public in India, it must satisfy several regulatory requirements set by SEBI (Securities and Exchange Board of India). Here’s a look at the key eligibility rules:
i) Net Tangible Assets
The company must have net tangible assets of at least ₹3 crore in each of the last three years.
ii) Asset Composition
No more than 50% of its assets should be in monetary form (such as cash or marketable securities). This ensures that the company has a real operational infrastructure.
iii) Operational Profitability
It must have earned a minimum pre-tax operating profit of ₹15 crore in at least three of the last five years.
iv) Net Worth
The company should have a net worth of ₹ one crore or more in the preceding three years.
v) Change of Name Condition
If the company has changed its name within the last year, at least 50% of its revenue must be generated from business activities conducted under the new name.
vi) Promoter Contribution
Promoters must contribute at least 20% of the post-issue capital and must hold it for at least three years after listing.
SEBI IPO Compliance and Filings
To ensure fair play and transparency, SEBI mandates the following:
i) Draft Red Herring Prospectus (DRHP)
The DRHP is a detailed document (often 500+ pages) that provides information on the company’s business, promoters, financial performance, and associated risks. It must be filed with SEBI and made publicly accessible for investor scrutiny.
ii) Listing Requirements
In the Initial Public Offering, the company must be prepared to list its shares on at least one national stock exchange—either NSE or BSE.
iii) Oversubscription Refund
If the IPO is oversubscribed, the company must refund excess money to investors within 15 days. Failure to do so attracts penalties.
iv) IPO Open Period
The Initial Public Offering (IPO) must remain open for public subscription for a minimum of 3 and a maximum of 10 working days.
v) Advertisement Norms
Marketing materials and advertisements must accurately disclose facts and clearly highlight key risk factors.
vi) Initial Public Offering (IPO) Grading
IPOs must be graded by a registered credit rating agency to help investors assess risk, though this is optional in some cases now.
vii) Retail Reservation
A minimum of 35% of the IPO must be reserved for retail investors applying for amounts less than ₹2 lakh.
Legal Framework: Securities Contract Regulation Act
The Securities Contracts (Regulation) Act, 1956, provides the legal foundation for securities trading in India. It ensures transparency, enforces rules on stock exchanges, and protects investors against unfair trade practices.
Step-by-Step Initial Public Offering (IPO) Process
Let’s go through the IPO journey from a company’s perspective:
i) Hiring an Investment Bank
The first step is to appoint a merchant banker or investment bank (like ICICI Securities, Kotak, or Axis Capital) who will underwrite and manage the Initial Public Offering(IPO).
The selection criteria include:
- Experience and reputation
- Research capability
- Past IPO performance
- Institutional investor network
ii) Due Diligence & Underwriting
The merchant bank performs extensive due diligence, analysing the company’s legal, financial, and operational health. Then, the bank agrees to either:
- Firm Commitment: Take full responsibility for selling the shares and absorb unsold shares.
- Syndicate Underwriting: Form a consortium of banks for large IPOs where each bank shares a portion of the underwriting.
iii) Filing the DRHP
The DRHP is submitted to SEBI and includes:
- Company history and leadership
- Financial statements and ratios
- Industry landscape
- Use of IPO funds
- Associated risks
Pricing the Initial Public Offering(IPO)
i) Valuation & Issue Price
For instance, if a company is valued at ₹100 crore and wants to sell 20% to the public, it needs to raise ₹20 crore. If shares are priced at ₹200, then 1 lakh shares will be issued.
ii) Types of Pricing Methods
There are two common approaches:
(a) Fixed Price Issue
The price of the share is fixed in advance and declared in the prospectus. Investors know exactly what they’re paying.
(b) Book Building Issue
A price range is declared (e.g., ₹100–₹120), and investors place bids within this band. The final price is determined based on demand. The minimum price is called the “floor price” and the maximum is the “cap price” (not more than 20% apart).
IPO Share Distribution
Shares are divided among 3 main categories:
| Investor Category | Reservation |
| Qualified Institutional Buyers (QIBs) | 50% |
| Non-Institutional Investors (HNIs) | 15% |
| Retail Investors (< ₹2 lakh) | 35% |
Application Process for Initial Public Offering
Retail investors can apply through ASBA (Application Supported by Blocked Amount), where the bid amount is blocked in the applicant’s bank account until allotment.
Example:
If the IPO price is ₹300 and the lot size is 15, then the minimum investment is ₹4,500.
Oversubscription vs. Undersubscription
Oversubscription
When more applications are received than shares available, allotment is done via:
- Lottery system for retail investors
- Pro-rata basis for HNIs and QIBs
Undersubscription
If the IPO is not fully subscribed, all valid applicants receive full allotment.
Share Allotment & Refund
- Invalid applications (wrong PAN, DEMAT, etc.) are rejected.
- Valid applications are considered for allotment.
- In oversubscribed IPOs, lucky winners are selected via computerized draw.
- Refunds for unallocated bids are processed via ASBA within days.
Listing on Stock Exchange
Within 3 working days of the IPO closure, the company’s shares are listed on stock exchanges like NSE or BSE.
From that day, shares are freely tradable, offering liquidity to investors and access to capital for the company.
Tips to Increase IPO Allotment Chances
i) Apply via Multiple DEMAT Accounts
Use multiple DEMAT accounts (family/friends with different PANs) to increase chances, but avoid duplicate PAN use.
ii) Apply at the Cut-Off Price
Maximize your chance by selecting the highest price within the band. This increases the chance of allotment as you’re bidding at the highest price the company may fix.
iii) Avoid Last-Minute Rush
Banking apps and portals often crash due to a last-minute rush. Apply on day one or two.
iv) Apply Under Shareholder Category
If the IPO is from a subsidiary of a listed company and you hold the parent’s shares, you may get preferential allotment under the “shareholder category.”
v) Fill Accurate Application Details
Incorrect details like wrong PAN, bank account, or DEMAT info lead to disqualification. Always verify your application before submitting.
Conclusion
An IPO is not just a funding event—it’s a transformation. For companies, it means capital, visibility, and credibility. For investors, it’s an opportunity to get in at the ground level of a company’s public journey.
With a sound understanding of the IPO process, its risks, and strategic application, retail investors can make informed decisions and potentially earn substantial returns.
Whether you’re an investor looking to grow wealth or an entrepreneur eyeing the public market, understanding IPOs is a decisive step toward financial success.