How an IPO Works in India: From Company Decision to Your Allotment

Every time a company announces an IPO, there's a lot of noise — oversubscription numbers, grey market premiums, listing day gains. But most retail investors don't actually understand how the process works: why some IPOs are priced the way they are, what the different allotment categories mean, and why you don't always get shares even when you apply.

Here's how it actually works, from start to finish.

What Is an IPO?

An IPO — Initial Public Offer — is when a private company sells its shares to the public for the first time, converting from a private company to a publicly listed one. From that point, the shares trade on stock exchanges (BSE, NSE) and anyone can buy or sell them.

A company goes public for a few reasons: to raise capital for growth, to allow early investors and founders to exit, or to create a market-priced currency for future acquisitions.

Primary vs Secondary Market

The primary market is where new securities are first created and sold. An IPO is a primary market transaction — the company (or selling shareholders) receive the money. Once the IPO closes and shares are listed, the secondary market takes over. The secondary market is the stock exchange where you and I buy shares from each other — the company doesn't see that money.

This distinction matters: when you apply for an IPO, your money goes to the company (or existing shareholders in an Offer for Sale). When you buy a listed share on NSE, your money goes to whoever was selling.

Types of Issues

IPO (Initial Public Offer): The first public issue of a private company going public.

FPO (Follow-on Public Offer): A second or subsequent public issue by a company already listed. Used to raise additional capital.

Rights Issue: An offer to existing shareholders to buy additional shares directly from the company, usually at a discount. You don't have to participate, but if you don't, your ownership percentage gets diluted.

Bonus Issue: Shares given to existing shareholders free of cost, in proportion to their existing holding. Your percentage doesn't change — the share price adjusts proportionally. Not a "gift" — it's just a stock split with different accounting treatment.

Offer for Sale (OFS): Existing shareholders (founders, PE investors) sell their shares to the public. The company receives no money — the proceeds go to the selling shareholders. Common in government divestment programs.

Preferential Allotment: Issue of shares to a select group of investors (not the general public). Common for strategic investors, promoters, or institutional investors.

QIP (Qualified Institutional Placement): A private sale by a listed company to institutional investors (mutual funds, FIIs, insurance companies) with easier regulatory compliance — no prospectus required, faster than an FPO.

How an IPO Is Priced: Fixed Price vs Book Building

Fixed Price Issue

The company decides the issue price upfront and announces it in the offer document. Investors know exactly what they're paying. Demand is only known after the subscription window closes. 50% of shares are reserved for applications below ₹2 lakh.

Book Building Issue

Most IPOs in India today use this method. Instead of a fixed price, the company announces a price band — say ₹450 to ₹500 per share. Investors bid at a price within this range. The final price (cut-off price) is determined after the bidding period based on actual demand. If you bid at the cut-off price, you get shares at whatever the final price turns out to be.

Book building has an advantage for the company: it discovers the true market price for the IPO rather than guessing it in advance.

Who Gets to Apply: The Three Categories

In a book-built IPO, investors are divided into three categories with separate allotment pools:

Retail Individual Investors (RII): Applications up to ₹2 lakh. 35% of shares are reserved for this category. If oversubscribed, allotment is done by lottery — each valid applicant gets at most one lot.

Non-Institutional Investors (NII) / HNI: Applications above ₹2 lakh (but not institutional). 15% of shares reserved. Proportional allotment if oversubscribed.

Qualified Institutional Buyers (QIB): Mutual funds, insurance companies, banks, FIIs. 50% of shares reserved. Discretionary allotment by the company.

This structure is why applying for exactly one lot (the minimum bid) gives you the same probability of allotment as applying for 10 lots — in the retail category, it's a lottery.

SEBI Eligibility Conditions for an IPO

SEBI doesn't let just any company go public. A company must meet one of two sets of conditions:

Profitability route: In all 3 preceding years, at least ₹3 crore net tangible assets each year (with monetary assets under 50%), at least ₹1 crore pre-issue net worth, at least 3 of the last 5 years must have distributable profits, and the issue size must be less than 5 times pre-issue net worth.

Alternatively: Book-building process must be used with at least 50% allotted to QIBs, or financial institution participation of at least 15% in the project (of which 10% from an appraiser), and the minimum post-issue face value capital must be ₹10 crore, or mandatory market-making for at least 2 years.

These conditions exist to protect retail investors from investing in companies that are too early-stage or financially weak.

Key Participants in an IPO

Issuer: The company raising capital.

Lead Manager (Book Running Lead Manager / BRLM): The investment bank that designs the offering — drafts the prospectus, does the roadshow, sets the price band, manages the book-building process, and handles SEBI filings.

Underwriter: Guarantees to subscribe to all unsold securities if the IPO is undersubscribed. Often the same entity as the lead manager.

Registrar to the Issue: Processes all investor applications — collects bids, verifies them, handles allotment and refunds. CAMS and KFin Technologies are major registrars.

Banker to the Issue: Manages the collection of application funds into Escrow accounts and their eventual release.

The Application Process

Since 2019, ASBA (Application Supported by Blocked Amount) is mandatory. When you apply for an IPO, the money is blocked in your bank account — not debited. If you don't get allotment (or get less than you applied for), the blocked amount is automatically unblocked. This means you earn interest on your money during the application period.

You can apply via:

• Your bank's net banking (ASBA)
• Your broker's trading platform
• UPI-based applications through the exchange's app

What Happens After the Issue Closes

1. Subscription figures are published — total applications received vs shares available in each category.
2. If oversubscribed in retail category, a lottery is run. Each valid application (regardless of lot size) has equal probability.
3. Shares are credited to your demat account typically within 6 days of issue close.
4. Shares list on the exchange and trading begins.

IPO Allotment: The Realistic Expectations

Most popular IPOs are massively oversubscribed in the retail category — sometimes 50x to 100x. This means for every 100 people who applied, only 1 or 2 get allotment. Applying for multiple lots doesn't help your chances.

The grey market premium (GMP) you see before listing is an unofficial indicator of listing price expectations — it's not regulated, not guaranteed, and often inaccurate. Don't base your application decision purely on GMP.

The real question for any IPO is: would I want to own this stock at this price for the next 3–5 years? If yes, apply. If you're only in it for listing day gains, you're speculating, which is fine — just understand that's what you're doing.

FPO: When a Listed Company Raises More Capital

An FPO (Follow-on Public Offer) follows the same basic process as an IPO but for a company already listed. The key difference: investors can compare the FPO price to the current market price to assess whether it's attractive.

For an OFS (Offer for Sale), the company files the offer document with SEBI, and selling shareholders can offer their shareholding to the public. The shares are not newly created — existing shares change hands.

The One Thing Most Retail Investors Miss

Applying for an IPO is not the same as investing in a company. The real investment decision happens after listing — when you decide whether to hold or sell. Many retail investors apply for an IPO, get allotted shares, see a small listing gain, sell immediately, and repeat. That's a trading strategy, not investing.

If you believe in the company's long-term business, hold through volatility. If you applied primarily for the listing pop, have a clear exit plan. Mixing the two — holding because the price fell below your application price — is where most IPO investors get stuck.