How an IPO works in India, from filing to listing

An IPO can consist of a fresh issue, in which the company creates new shares and receives the money, an offer for sale, in which existing shareholders sell some of theirs and receive the money, or both. The difference matters. Money from a fresh issue funds the business, for example to repay debt or to build capacity. Money from an offer for sale goes to the sellers, and the company gets none of it. The offer document states the split and what the fresh money will be used for, under the heading objects of the issue.

The company appoints merchant bankers, called book running lead managers, who help prepare a Draft Red Herring Prospectus and file it with SEBI. SEBI reviews it and issues observations. Once the company has addressed them, it files the Red Herring Prospectus with the Registrar of Companies. This long document sets out the business, its financial statements, its promoters, pending litigation and, importantly, the risk factors.

The document is public. For any IPO you are considering, the sections on risk factors, objects of the issue and financial information are the most useful to read.

The company announces a price band, a range within which investors may bid, at least two working days before the issue opens. The issue stays open for three working days. The day before it opens, a group of large institutions called anchor investors is allotted shares, which gives an early indication of institutional demand.

Bidders fall into categories. In a typical issue by a profitable company, not more than half is reserved for qualified institutional buyers such as mutual funds and insurers, not less than 15 per cent for non-institutional investors who bid for more than ₹2 lakh, and not less than 35 per cent for retail investors who apply for up to ₹2 lakh. Retail applicants use their bank account or a UPI mandate; the amount is blocked, not debited, until the shares are allotted.

When the issue closes, the registrar adds up the bids. A category is oversubscribed when investors have asked for more shares than were offered. If the retail portion is oversubscribed, allotment is made by lottery in the minimum lot size, so some applicants receive shares and others receive none. Blocked money is released for those who are not allotted anything, and shares are credited to the demat accounts of those who are.

Shares are listed on the BSE, the NSE or both, normally within three working days after the issue closes. The opening price is found through a short pre-open auction. A listing gain is the difference between the listing price and the issue price. It is not guaranteed: some shares list well above the issue price, and some below.

The unofficial grey market premium quoted in the press is just gossip between traders. It is not regulated and is often wrong. Rules also lock in part of the pre-IPO holdings for a period, to stop early holders selling straight away, and the end of a lock-in can affect the price.

What does the company actually sell, and how does it make a profit? What will the fresh money be used for? How much of the issue is an offer for sale, and who is selling? How does the valuation compare with similar listed companies, for example on the price-to-earnings ratio? What do the risk factors say? Nobody can predict a listing price, and this guide is general information, not a recommendation for or against any issue.

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