What is an IPO?

IPO stands for Initial Public Offering, which is the process by which private companies offer a part of their company to the public by selling part—also called equity, through shares. In essence, every company in the Indian National Stock Exchange all got their through IPO. The Securities and Exchange Board of India (SEBI) heavily regulates the process.

What is the Importance of Initial Public Offers in the Indian Stock Market?

So, why are IPOs such a big deal in the Indian Stock Market? A few reasons include:

1. Makes the Indian Stock Market more robust.

The Indian Stock Market is like any other market — the more the sellers, the better. And, Initial Public Offerings (IPOs) are the major way new companies and industries get to be a part of the National Stock Exchange(NSE). So, the more companies who get listed, the more robust it gets.

2. Increased Cash Flow in the Indian Stock Market.

More IPOs mean more money from investors is entering the Indian Stock market. This means the value of the market increases. This value is called market capitalization.

3. More options for Investors.

IPOs guarantee more companies in the Indian Stock market, and more companies mean more options for investors.
Other importance of IPOs to the Indian Stock Market includes wider representation of industries in the market; and, enhanced transparency in most companies as they are bound by law to reveal all about their company before they can go public.

Why do Companies Go for Initial Public Offers?

So far, we have established that companies use IPOs to raise capital by selling shares to the public. But are there more reasons why they do so? Yes, and a few of the reasons include:

1. Business Expansion

A manufacturing company with a focus on office furniture distributed to only 3 states might want to expand to 6 states. To do this, they need money. To raise this money, they might decide to go public.

2. Private Investors' Exit

Mr. Jamal owns 20% of  XYZ, a Pvt Limited Company. But, he wants out him and 3 other investors. One option they have is to convert the equity they hold in XYZ into cash. To do this, XYZ can go public. Money from investors can then be used to pay Mr. Jawal and other investors who want out.

3. Credibility and Transparency

Going public is perhaps one of the most effective ways for a company to increase its credibility, and this is because, as per regulations, before a company is allowed to go public, it must reveal key information about itself in a document called Prospectus. This document is then sent to would-be investors like when the company is about to go public. The prospectus often contains the company's financial statements, structure, purpose of IPO, etc.

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What is the Role of Government Agencies in Approving IPOs?

The fact that the stock market, and in this case, the Indian National Stock Exchange, is pivotal to India's economy, the Government through certain agencies like the Securities and Exchange Board of India (SEBI) play an important role. Some of these roles include:

1. Regulatory Oversight: Government agencies ensure that IPO complies with applicable securities laws and regulations.
2. Ensures Best Practices after IPO: Just because a company releases an accurate financial report during IPO doesn't mean they would do the same after. So, Government agencies stay on Companies to ensure they do not go rogue and begin to act outside of the parameters set by law after successfully going public.
3. Investor Protection: Government agencies protect the interest of investors like yourself in the Indian Stock Exchange. Government Agencies are the only friends you have on the table. 

The government also assesses the prospectus of companies to ensure information shared is correct. You will be surprised by how much lies can be told by organizations to get money from investors.

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What are The Key Parameters to Look for in an IPO Before Investing?

Do not join the bandwagon when it comes to investing in IPOs else you will get burnt. Here are a few parameters to look at in an IPO before Investing.

1. Invest in an industry you are familiar with.

This is a fundamental rule in investing: Only invest in IPOs of companies you know and understand. Doing this will give you foundational knowledge of the market, supply, demand, and the company's product.

2. The Company's Finance.

You must be able to read financial reports, and there is no escaping it, as it is the only way to judge if a company is worth investing in. If you don't know how to do this, then either learn or find out someone who is reliable and know how to assess the companies finances.

3. Company's Competitors.

If ABC ltd, an electronics manufacturing firm's price of shares before listing is ten times bigger than that of another company in the same industry, it is probably wise if you did a better research.

4. Purpose for Capital.

So, that shiny company that is about to go public wants to expand, pay debt and branch into an entirely new industry, all at the same time. Do you think it is wise to invest your money? These are questions you should ask yourself.
Other parameters you should take seriously before investing in an IPO is the company's core management team and the growth potential of the company. A company which does not have any experience in a field where it is venturing in, how can we say that it will succeed there.

What are the tax rules for IPO investing?

Taxation is a big deal. And in India, profits made from sales of securities are subject to income tax. There are two scenarios when you invest in an IPO, you will either make money or, unfortunately, you will lose money. Both scenarios have different tax implications.
Taxation implications for both loss and gain is determined by how long you hold the share.
Income from the sale of of your shares can either be short-term or long-term depending on the holding period, and the same applies to losing, where there is STCL(Short-term capital loss) and LTCL(Long-term capital loss)
If you hold your shares for less than 12 months after listing, it is short term. But if you hold it for more than 12 months, it is long term.

Taxation when you profit

When you lose

How Can I Invest in an IPO, A Step By Step Guide?

After all that has been said, if you are ready to invest in an IPO, take the few steps below.

Research the IPO

The first step, of course, is to research the IPO thoroughly. All the information you need about the company can be gotten from the Draft Red Herring Prospectus (DRHP). Here is DRHP sample, a DRHP report is quite large report of 200+ pages. 

1. Set Up a Demat and Trading Account

Every investor in India needs a Demat account and a trading account both of which can be gotten through brokers or banks. 

2. Apply for the IPO Online

There are two ways to apply for an IPO, ASBA (Application Supported by Blocked Amount) or UPI-Based Applications. The former blocks the required amount in your bank account until shares are allotted, and the latter allows you to invest using your UPI ID.

1. Choose the type of investor you are

As stated earlier, there are several types of Investors. Select your category, such as retail investors (applying for up to ₹ two lakhs) or non-retail investors. Your category often determines how much you are allowed to invest in.  

2. Understand how the shares are allotted

Understand how the shares are allotted. The company going public and its underwriters manage the share allotment process based on the demand for the IPO and investor categories. For retail investors, allotment is often done through a lottery system if the IPO is oversubscribed. For non-retail investors, allotment is proportional to the bid size. Understanding this process can help you set realistic expectations and make informed investment decisions.

3. Track the Stock Listing Date

After allotment, the shares will be listed on the stock exchange (NSE, BSE, etc.), where they can be traded publicly. Pay attention to the date and study patterns of demand for the shares. What you observe will help you make a decision of whether to sell or hold.

IPOs of 2025

FAQs on IPO

1. How do you track IPOs, i.e., when are new IPOs launched?

IPOs can be tracked through platforms like the NSE and BSE websites.

2. What is the meaning of "IPO" listed on a premium?

It means the shares’  listing price was greater than IPO issue price. 

3. Can NRIs invest in Indian IPOs?

Yes. Non Resident Indians can invest in IPOs which are launched time to time at Indian Stock Exchanges. 

4. Is there any lock-in period for IPO investing?

Retail investors rarely have a lock-in period, but anchor investors and promoters may have.

5. Are IPOs risky to invest in?

IPOs have its own risks like market volatility and oversubscription. 

6. Can I sell my IPO shares immediately when they are listed on the stock exchange?

Yes, you can sell your IPO shares immediately after listing.

7. What is the meaning of IPO oversubscribed?

An IPO is oversubscribed when the demand for its shares exceeds the numbers offered.

8. Who determines the price of IPOs?

The company going public and its underwriters determine an IPO price.

9. Can I be assured of the IPO allotment if I apply for it?

No. IPO allotment depends on a lottery system.

10. What does it mean to be under-subscribed in an IPO?

An IPO is under-subscribed when the number of shares applied for is less than those offered.