How Does an IPO Work?
An IPO (Initial Public Offering) works through a structured, SEBI-regulated process that takes a private company through multiple stages before its shares are available for trading on NSE or BSE. Understanding each step helps investors know when and how to participate in an IPO effectively.
Step-by-Step IPO Process in India
- Appointment of investment banks: The company appoints lead managers (SEBI-registered merchant banks like ICICI Securities, Kotak, SBI Capital) to manage the IPO process.
- Due diligence and DRHP filing: Extensive due diligence is conducted and a Draft Red Herring Prospectus (DRHP) is filed with SEBI, containing all material information about the company.
- SEBI review: SEBI reviews the DRHP, may raise queries, and issues observations (approval) within 30 days typically.
- Price band determination: The company and book running lead managers determine the price band, a floor price and a cap price between which investors can bid.
- RHP filing and opening of subscription: The final Red Herring Prospectus (RHP) is filed and the IPO opens for 3-5 days of public subscription.
- Book building: Investors across RII, NII, and QIB categories submit their bids. The final allotment price is typically the cap price (for oversubscribed IPOs).
- Allotment: Shares are allotted based on availability and the computerised lottery system for retail investors.
- Refund and credit: Unallotted application amounts are refunded; allotted shares are credited to demat accounts.
- Listing: Shares begin trading on NSE and/or BSE on the listing date, typically 6-7 business days after IPO close.
The Book Building Process
Most mainstream IPOs in India use the book building method where a price band is set and investors bid at their desired price within that band. The final issue price (cut-off price) is determined based on demand. Retail investors can bid at cut-off price, ensuring allotment at whatever price is finally decided. This is more transparent than fixed-price IPOs where the price is set in advance.
Timeline of an IPO
| Stage | Approximate Timeline |
|---|---|
| DRHP filing to SEBI approval | 30-75 days |
| IPO subscription period | 3-5 days |
| Allotment | T+6 from IPO close date |
| Listing date | T+7 from IPO close date |
What Determines IPO Success?
An IPO is considered successful when it is oversubscribed (more applications than shares available) and lists at a premium to the issue price. The subscription ratio, especially in the QIB category, is often used as a proxy for institutional confidence. High QIB subscription typically indicates strong fundamental value.
Key Takeaway
The IPO process is a well-structured, SEBI-supervised pathway from private to public company. Understanding each step helps investors apply at the right time, know when shares will be credited, and plan their listing-day strategy. Use the Lemonn app to track upcoming IPOs, review their financials, and decide whether to apply.
