Initial Public Offerings (IPO) – Meaning, Working, and Benefits

IPO stands for Initial Public Offering, the process by which a private firm first sells its shares to the general public. According to recent reports, over 190 companies are either approved or awaiting approval to go public, with potential fundraising expected to cross ₹2.5 lakh crore in 2026. 

Successful IPOs can generate significant wealth for founders and early investors. However, recent market volatility has shown that some companies experience a significant decline in stock prices post IPO. In this blog, we will explain what an IPO is and how the IPO process works. We will also provide a guide on how to invest and cover its benefits, drawbacks, and related key terms.

Table of Contents:

• What is an Initial Public Offering (IPO)?
• Why Do Companies Launch an IPO?
• Different Types of IPOs
• IPO Process Step-by-Step
• Who Can Invest in an IPO?
• How to Invest in an IPO
• Pros and Cons of IPO Investing
• Key Terms Related to IPOs
• How Does an IPO Differ from Regular Stock Market Investing?
• List of Upcoming IPOs in India for 2026

What is an Initial Public Offering (IPO)?

In an Initial Public Offering (IPO), a private company offers shares to the general public to raise funds. The company’s shares are offered for sale on a public stock exchange, making it possible for both individual and institutional investors to acquire and sell them.

Companies decide to go public through an IPO for a variety of reasons, such as raising funds to support expansion, enabling early investors to sell their holdings, and gaining public visibility and credibility. A company’s IPO can give investors the chance to invest in its early years, but there are risks involved as well.

Why Do Companies Launch an IPO?

Going public can take several months and involves extensive regulatory requirements and due diligence. Companies choose this complex path for several reasons, such as:

1. Access to Capital for Growth

The main reason behind an IPO is to raise capital from a large pool of investors. Companies use this money to expand operations, fund research and development, enter new markets, and pay off existing debt.

2. Liquidity for Existing Shareholders

An IPO allows early investors, founders, and venture capitalists to sell their stake through an Offer for Sale (OFS). They sell some or all of their illiquid private shares to the public market, realizing returns on their investment. 

3. Enhanced Visibility and Credibility

Going public mandates adherence to strict regulations and standards, improving brand recognition and trust in a company. This can attract top talent, partners, and boost sales. 

4. Access to Future Fundraising

If the IPO is successful, it creates a public market valuation of the company. This makes the process of future fundraising and benchmarking performance easier. 

5. Use Shares as Currency for Acquisitions

After listing, a company’s stock becomes a valuable currency. That means it can use its publicly traded shares to acquire other companies through stock swaps rather than using cash. 

Different Types of IPOs

There are two main methods a company can use to price its shares when launching its IPO in India: the Fixed Price Issue and the Book Building Issue.

1. Fixed Price Issue 

In such IPOs, the company and underwriters set the price in advance. They base it on an analysis of the company’s financial data. Investors need to pay the full amount for the shares at the time of application. Investors know the total demand for securities after the issue closes. This method may undervalue the company shares at the IPO, with the price mostly lower than the market value. 

2. Book Building Issue

A price range, also called a price band, is set. The final price is decided by investor demand through bidding, creating a price discovery during the IPO process. Here, the lowest price is the floor price and the highest one is the cap price. Demand can be checked every day on the stock exchange websites during the book-building period.  

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IPO Process Step-by-Step

The IPO process typically involves several steps, including filing the Draft Red Herring Prospectus (DRHP) with SEBI, going through a review and approval process, working with underwriters to set the final offer price, and finally listing the shares for public trading.

Let’s look at the various processes involved in an IPO:

1. Selecting Underwriters: A company that wants to go public usually hires an investment bank or a group of investment bankers to manage the IPO. The underwriters give support during the process, assist in determining the share offer price, and market the IPO to potential investors.
2. Filing the DRHP: The company files its Draft Red Herring Prospectus (DRHP) with SEBI and the stock exchanges. This extensive document includes detailed information about the company’s financials, business operations, and risks associated with the investment.
3. Regulatory Review Process: SEBI reviews the DRHP. It then provides comments on areas that need further clarification or modification before approval.
4. Conducting a Roadshow: The company and its underwriters market the IPO to potential investors. The company’s executives and underwriters meet with institutional investors, analysts, and other interested parties to discuss the company’s business and financial prospects.
5. Setting the Offer Price: Based on feedback from the roadshow and investor demand, the underwriters work with the company to determine the offer price or price band for the shares.
6. Allocating Shares to Investors: After finalizing the offer price, the underwriters allocate shares to investors who have bid for them. Under current Indian market regulations, the process from bid closure to listing typically takes T+3 days (trade date plus three working days). 
7. Going Public: On the IPO day, the company lists its shares on a public stock exchange. Investors can then trade these shares in the secondary market. 
8. Post-IPO Compliance: The company becomes a publicly listed company after the IPO. To maintain transparency with shareholders, the company must submit its financial and business reports regularly to SEBI and the stock exchanges.

Who Can Invest in an IPO?

Most individuals and institutions can invest in an IPO in India, provided they meet the basic eligibility requirements set by SEBI and the stock exchanges. Here are three primary categories:

1. Retail Individual Investor (RIIs): Any individual investor with a valid Demat account, trading account, and PAN card can apply for an IPO. For them, the minimum investment limit is less than ₹2 lakh in a single IPO application. They typically receive a minimum 35% of the total IPO size.

2. High Net-Worth Investors (HNIs): Investors who apply for shares worth more than ₹2 lakh in a single category qualify as HNI investors. They can bid for larger quantities and often apply via a non-institutional investor category. They usually receive usually 15% of the total IPO size.

3. Qualified Institutional Buyers (QIB): A large group that includes foreign institutional investors (FII), mutual funds, insurance companies, and banks. These usually receive usually 50% of the total IPO size.

How to Invest in an IPO?

Investing in an IPO is a simple process if you follow these simple steps:

1. Open a Demat or Trading Account

To apply for an IPO, you must have an active Demat account and a trading account with a registered broker. A Demat account holds your shares electronically, while a trading account is used to place the buy order. Also, connect this account with your bank account and verify with your PAN card.

2. Read and Understand IPO Details 

Before applying, study the IPO details carefully. Read and review the company’s financials, RHP, price band, minimum lot size, and opening and closing dates. 

3. Place Your IPO Application

To apply for IPO, log in to your broker’s platform or via UPI-based ASBA. Select the lot size you wish to apply for, choose the bid price with the price band, and submit your application.  

4. Accept the UPI Mandate

After applying, you will instantly receive a notification on your linked UPI app. Approve the UPI mandate within the given time to block the application amount. When shares get successfully allotted to you, this money gets debited.

5. Check Allotment and Listing Status 

Registrars typically finalize the allotment process within T+3 days. So, check the allotment status on the registrar’s website or through your broker. If you receive an allotment, the registrar credits the shares to your Demat account. Then, after listing, you can sell shares on the stock exchange (NSE/BSE) or hold them for long-term investment based on your strategy. 

Pros and Cons of IPO

An IPO can be a significant milestone for a company and offer multiple benefits, but it also comes with some risks that should be carefully considered before choosing this option. 

As an investor, when considering investing in a company that has gone public through an Initial Public Offering (IPO) or Follow-on Public Offering (FPO), there are several pros and cons to keep in mind. 

Here are some of the main advantages and disadvantages of IPO:

Pros of IPO

• Raise Capital for Growth: An IPO can be an effective way for a company to raise a significant amount of capital by selling shares to the public.
• Potential for High-Returns: IPOs offer investors the opportunity to invest in early-stage companies that have high growth potential before they become well-established.
• Diversification Opportunity: Investing in IPOs allows investors to add new ventures or sectors to their portfolio, minimizing overall investment risk.
• Increased Visibility and Credibility: Going public can increase a company’s visibility and credibility, as well as its profile among potential customers, suppliers, and partners.
• Greater Liquidity: Publicly traded stocks are generally more liquid than private investments, meaning that it is easier to buy and sell shares.

Cons of IPO

• High Cost and Time Investment: Preparing for an IPO can be a costly and time-consuming process, involving legal, accounting, and other expenses.
• Loss of Control: Going public can result in a loss of control for founders and existing shareholders, as they may no longer hold a majority of the company’s shares.
• Lock-up Periods: Many companies impose lock-up periods on insiders and early investors. These restrictions limit liquidity and can put downward pressure on the stock price.
• Stock Price Volatility: Newly public companies can experience significant volatility in their stock prices, which can be unsettling for some investors.
• Investment Risk: Investing in IPOs can be risky, as there is often limited information available about the company and its prospects.

Key Terms Related to IPOs

To have knowledge about Initial Public Offering, it is important to understand these basic terms used in the process. Some of the commonly used terms are provided in the table below:

How Does an IPO Differ from Regular Stock Market Investing?

Here is how  IPO investing differs from regular stock market investing:

List of Upcoming IPOs in India for 2026

Here are some of the best upcoming IPOs in India:

Conclusion

An Initial Public Offering (IPO) offers businesses a powerful way to raise capital by selling shares to the public. For companies, they must have a strong business model, solid financials, and a clear growth strategy before launching an IPO. For investors, the IPO market presents a wealth of opportunities across high-growth sectors. Stock prices fluctuate, so before investing in an IPO, you should conduct your own research, consider your risk tolerance, and long-term financial goals. 

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