29 Jul 2025

What is an IPO? How an Initial Public Offering Works

Ever seen headlines like "NSE IPO opens tomorrow" and wondered what that means?

Let's break it down in simple words.

An IPO is like opening the front door to the public.

Imagine you've built a profitable bakery for years. Until now, you've been running it with your own money. However, to expand into more cities, upgrade kitchens, and hire additional staff, you now require more capital.

So, you decide to sell a portion of your ownership to the public through the stock market.

That's exactly what an IPO (Initial Public Offering) is.

It's when a private company decides to go public by offering shares to retail and institutional investors for the first time.

Why do companies go for an IPO?

  1. Raise funds—to scale, reduce debt, or launch new products.
  2. Provide an exit to early investors, who've backed the company in its startup days.
  3. Build credibility—a listed company is under more regulatory scrutiny and often earns higher trust.
  4. Use shares as currency for acquisitions or Employee Stock Ownership Plans (ESOPs).

IPO Process in India (Step-by-Step)

  1. Hire Investment Bankers: The company partners with investment banks (underwriters) to help structure the IPO. They analyse finances, fix the capital to be raised, and manage risk.
  2. Drafting the RHP (Red Herring Prospectus): This document has all the crucial details like financials, business model, risk factors, etc. It gets filed with SEBI for approval.
  3. SEBI & Registrar Review: If SEBI likes what it sees, the IPO gets a green light. If not, they send comments that the company must address.
  4. Apply to Stock Exchanges: Companies choose where they want to be listed, like NSE, BSE, or both.
  5. Roadshows: Company leaders hit the road, pitching the IPO to big institutional investors across India.
  6. Pricing the IPO: Two common pricing methods:
  7. Fixed Price: A set price per share.
  8. Book Building: A price band is set, and investors bid within the band. The final price is based on demand (cut-off price).
  9. Open to the Public: Investors can now apply via banks, brokers, or apps. Bidding usually lasts 3-5 days.
  10. Allotment & Listing: Shares are allotted based on demand. Once shares are in your Demat account, the company gets listed and trading begins!

Types of IPOs Explained Simply

Fixed Price IPO The company and bankers fix a share price in advance. You know the price upfront, but demand is revealed only after the IPO closes.

Bookbuilding IPOs are more common today. A price band (e.g., ₹300-₹350) is offered. You bid within this range. Based on demand, a final price (cut-off) is decided.

Follow-on Offers: When Listed Companies Need More Funds

Once listed, companies can still raise funds via:

  1. Follow-On Public Offer (FPO): Listed companies issue new shares (dilutive), or existing shareholders sell theirs (non-dilutive). Example: A founder cashes out by selling some of their stake.
  2. Offer for Sale (OFS): Mostly used by promoters to reduce their stake. Faster than an FPO, often done in just one trading day.

What happens after the IPO?

Once listed:

  1. The stock gets a ticker symbol (like RELIANCE or ZOMATO)
  2. It starts trading on stock exchanges like NSE/BSE
  3. Prices move based on demand and supply, just like any other listed company

This is when public shareholders, mutual funds, and even you can buy or sell the stock.

Famous IPO Examples

  1. Zomato IPO (2021): One of the first major consumer tech IPOs in India saw huge retail interest.
  2. LIC IPO (2022): India's largest IPO in terms of value raised, over ₹20,000 crore.
  3. Nykaa IPO (2021): Delivered multibagger returns initially before facing post-listing volatility.

Risks & Real Talk

  1. Hyped valuations: Some IPOs are overvalued, especially tech startups with no profits yet.
  2. Lock-in periods: Promoters and early investors may be restricted from selling for a certain time.
  3. Volatility: Many IPOs give quick listing gains… and then fall.
  4. Not all IPOs are created equal; deep analysis is needed before investing.

Learn to Analyse IPOs the Right Way

At Livelong Wealth, we teach you how to evaluate IPOs inside our Complete Trader Program. We cover:

  1. How to read the Draft Red Herring Prospectus (DRHP)
  2. How to identify whether the pricing is justified
  3. How to assess risks and red flags in advance
  4. How to use IPO data for long-term investment decisions

Check out our blog: Groww IPO Explained: Should You Worry About India's Largest Broker Being Loss-Making?