An Initial Public Offering is the first time a company sells its shares to the general public and gets listed on a stock exchange. Before the IPO, ownership sits with founders, employees and private investors. After it, anyone with a demat account can own a piece.
The two halves of an IPO
Almost every IPO is a mix of two very different things, and the split is printed in the offer document. It is the first thing worth reading.
Fresh issue. The company creates brand-new shares and sells them. The money goes into the company — to build capacity, repay debt, fund working capital, or whatever purpose is stated in the "Objects of the Offer".
Offer for sale (OFS). Existing shareholders — founders, promoters, private equity funds, early investors — sell shares they already own. The money goes to them. The company receives nothing and gets no new capital. Total shares outstanding do not change.
An IPO raises ₹1,000 crore: ₹300 crore fresh issue and ₹700 crore offer for sale.
₹300 crore reaches the company's bank account for the stated purposes.
₹700 crore goes to existing investors cashing out. The company's balance sheet is unchanged by that portion.
Why companies go public
To raise capital that never has to be repaid. Equity has no interest and no maturity date.
To let early investors exit. A private equity fund that invested seven years ago needs a way out. Listing creates one.
To use shares as currency. A listed company can pay for acquisitions and staff compensation in its own shares.
Visibility and credibility. Listing brings coverage, and audited quarterly disclosure that banks and large customers take seriously.
Because the window is open. Companies list when valuations are high and sentiment is positive. This is rational for them, and it is precisely why IPO supply surges in strong markets — which are also the times investors are least discriminating.
What the company gives up
- Disclosure. Quarterly results, related-party transactions, management changes, the lot — all public, on a deadline.
- Scrutiny. Every decision is judged by analysts and the price.
- Regulation. SEBI's LODR obligations, board composition rules, insider trading rules.
- Control. New shareholders have votes.
- Cost. Bankers, lawyers, auditors, registrars, and ongoing compliance.
The one thing to remember about pricing
In a secondary-market trade, the price comes from thousands of participants bidding against each other, with access to years of audited results.
In an IPO, the price is proposed by the seller, advised by bankers whose fees rise with the size of the issue, at a moment the seller chose because conditions are favourable. You are buying from someone who knows the business far better than you do and who picked the timing.
That does not make IPOs bad. It does mean the burden of proof sits with the offer, and enthusiasm is not analysis.
The journey from private to listed
- The company appoints merchant bankers and advisers.
- It files a DRHP with SEBI — the draft offer document.
- SEBI reviews it and issues observations; the company responds.
- The RHP is filed with the price band and dates.
- Anchor investors are allotted a day before the issue opens.
- The issue opens for public bidding, typically for three working days.
- Bidding closes; the basis of allotment is finalised.
- Shares are credited, refunds and unblocking happen.
- The shares list and trade on the exchange.
The next lessons walk through each of these.
Key takeaways
- An IPO is a company's first public share sale, listing it on an exchange.
- Fresh issue money goes to the company; offer for sale money goes to existing shareholders.
- Read the Objects of the Offer and the fresh-versus-OFS split first.
- Companies list when conditions favour sellers, which is worth remembering as a buyer.
- Oversubscription measures demand, not value.
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