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What is an IPO?

  •  6 min read
  •  32,405
  • 23 Jun 2025
What is an IPO?

India’s IPO market is on track for another record-breaking year in 2025, with fundraising expected to exceed ₹2 lakh crore as more than 100 companies, including major names like JSW Cement, Flipkart, and Zepto, prepare to go public. In the first quarter alone, 62 IPOs raised $2.8 billion, accounting for 22% of global IPO activity and highlighting India’s growing influence on the world stage. This surge reflects robust investor interest and the increasing participation of both established corporates and new-age tech firms in India’s dynamic capital markets.

But first, let’s understand what an IPO is. An IPO, or Initial Public Offering, is the process by which a privately held company offers its shares to the general public for the first time and becomes a publicly traded company on a stock exchange. This important financial event allows the business to raise substantial capital from a wide pool of investors, which can be used for expansion, debt repayment, or new projects.

By going public, the company increases its visibility, credibility, and transparency, as it must now adhere to regulatory and disclosure requirements. IPOs also provide an exit route for early investors and founders by enabling them to sell their shares.

A Quick Step-By-Step Guide For IPO Process In India

You need money to meet your various needs. It’s no different for a business. An initial public offering (IPO) is one of the avenues available to them to raise capital.

The bottom-line is this: Money is the bloodline of any business.

Consider these two instances:

Scenario 1: A 75-year-old garment manufacturing company operating in Tirupur, Tamil Nadu, needs to get into the branded apparel business. The company has years of expertise behind it but needs to build a brand. Extensive marketing and promotions have to be taken up urgently.

Scenario 2: A newsprint company in Indore, Madhya Pradesh, is desperate to shed its line of business and get into logistics. The prospects are good, especially in the booming e-commerce space.

So, how can these companies get more money?

These companies can borrow from banks. But what if they have borrowed a lot already? Will the banks still extend them loans?

Businesses can also take the IPO route. The IPO recourse can be even more attractive when the markets are on a high.

They may need an IPO to meet working capital needs. Working capital is needed to run the business. Companies also make use of IPOs by getting into new ventures, expanding operations and buying new equipment.

  • No repayment period is needed, unlike for loans offered by banks and financial institutions.
  • There is no need to pay interest on the capital raised.
  • The funds raised can be used to pay off old debts.
  • Awareness about a company increases when it goes for an IPO. Since the shares are publicly traded, its products and services are also discussed in detail. This often leads to successful brand building and a better market share for its products.
  • IPOs give investors an exit route. Several venture capitalists have exited a company after selling off their stake in the firm. Once the shares are publicly listed following an IPO, the prices often shoot up. So, the promoters and investors could become rich when they decide to sell off their stake.
  • Whenever a company becomes publicly listed, it is bound by a regulatory framework. This framework helps prevent fraud. It is enforced by the market regulator Securities and Exchange Board of India (SEBI). The accounting practices of a company may become much more transparent following these practices. This transparency may benefit the company in the long run.

The transactions take place in a specific part of the capital market: that part is the primary market. This is also where you get to invest in the IPO.

Since private businesses issue new securities to sell to investors, the primary market is also called the new issue market.

There are four common ways:

  • They can sell securities to the public through a public issue.
  • They can offer new securities to existing shareholders through a rights issue.
  • They can approach institutional investors through private placement.
  • They can sell securities to select investors through preferential allotment. (In this case, the price of the security may or may not match its market value.)

In all these scenarios, the transaction is between the business entity and the investor. On receiving the sale proceeds, the entity will issue security certificates to the buyers.

Keep in mind that many businesses approach large institutional investors during IPOs. In such a case, small investors may not be able to buy securities through the primary market. However, once the securities have been sold, they can be traded freely on the secondary market.

Here, the trade in securities occurs via a stock exchange. Instead of the issuer, the current holder of the security sells the security to a new buyer. The seller typically aims to sell the security at a price that is higher than his purchase price.

The secondary market can be of two types:

An auction market is a physical location where buyers and sellers gather. They state the rate at which they are willing to buy or sell the securities. All the information is public. As an investor, you can take a call accordingly. In a dealer market, the trade happens electronically (e.g. through fax or telephone). Here, a dealer serves as the middleman and carries a security inventory. They aim to make a profit on the transaction. So, you may need to shop around to get the best prices.

That’s not all. How you invest in both the markets also differs.

1. The Players

The Seller: On making a successful bid in an IPO, you buy the allotted securities directly from the company that issues those securities. In regular stock investing, you buy shares from existing shareholders. Should you wish to sell shares that you already own, you can do so as well.

The Go-Between: While there is no middleman in an IPO, the regular trade in stocks happens through an intermediary agent (such as a stockbroker).

Tip: Check that your intermediary agent is registered with the Securities and Exchange Board of India (SEBI) or recognised stock exchanges. This will help you safeguard your investments.

2. The Location

An IPO takes place on the primary market. It marks the first time that a company makes its shares available to the public for investment.

Regular stock investments happen on the secondary market. The shares belong to a company that is already traded on the stock exchange.

3. The Costs

When you invest in an IPO, the price (or a price range) is fixed. The amount is clearly mentioned in the company’s prospectus.

But the values of non-IPO stocks vary with the supply of and demand for those stocks. Current trends, inflation, the company’s growth prospects, and many other factors play a role.

4. The Assessment

To select an IPO, you should go through its prospectus and read third-party reports about the company. Then make your own informed assessment. Since the company has not been publicly listed yet, it may not have the detailed statements that are maintained by public companies. This lack of information can be a problem. But it can also prove a blessing.

Public companies maintain detailed paperwork to comply with SEBI’s strict guidelines. Working through this glut of information can be confusing for someone who is new to stock market investing.

5. Role of an Underwriter

Underwriters play a very crucial role in the process of IPO listing. Underwriters are representatives of investment banks that are involved with the IPO. They perform due diligence, filings with SEBI, pricing, marketing, roadshows even eliminate any risk to the company or rather guarantee a certain amount of fund raised (if the agreement with the underwriter is bought deal).

In case of a bought deal the underwriter buys the entire lot of shares at a highly discounted price, and resells the shares to its clients, public. Such an agreement will eliminate any risk for the company; however, the underwriter will take risk only in case the underwriter is sure to make a good spread in the deal.

There are different types of investors:

  • Institutional Investors

The underwriter will try and sell large chunk of these shares to a handful of its institutional clients like insurance companies, mutual funds etc. at a lucrative price before the IPO. A lock – up contract with such institutional investors varying from 90-180 days ensures minimal volatility on the day of IPO. As a general rule, 50% of allocation of share is to these institutional investors and is completely discretionary.

  • High Net Worth Individuals (HNIs)

Individual investors looking to invest more a value of more than INR 200,000 are categorised as HNIs. The allotment of shares to HNIs is proportionate and falls under 10 – 15%.

  • Retail Investors

The class of investors subscribing in an IPO for a value of INR 200,000 or less fall under this category. The probability of getting an allotment is higher under the retail quota as SEBI has designed the allotment method in a way that maximum retail investors are included. Allocation under the retail quota is nearly 35%. Basically, any adult competent enough to enter a legal contract can invest in an IPO. Essentially, you must have a Permanent Account number (PAN) issued by the Income Tax department and a valid demat account.

Trading account is a mandatory requirement, in case you intend to sell the stock on listing. It is therefore advisable to have a demat cum trading account. Kotak Securities offers one such account, making investing in an IPO hassle free.

Investing in an IPO can be exciting, but it also comes with unique risks and important considerations that investors like you should understand before participating. Unlike established companies, IPOs involve businesses that may not have a long public track record, making it difficult to assess their true financial health and future prospects. The information available in the company’s prospectus might be limited, and projections can be optimistic, sometimes failing to account for potential market challenges or competition.

Another key risk is volatility. IPO shares often experience sharp price fluctuations in their initial days of trading, driven by hype, speculation, or market sentiment rather than fundamentals. This can result in significant losses if the stock price falls below the offer price after listing. Additionally, the lock-in period for major investors and promoters may end soon after the IPO, leading to increased selling pressure and further price drops.

Valuation risk is also present, as companies may be priced aggressively to capitalise on favourable market conditions, leaving less room for upside potential. Furthermore, regulatory changes, industry-specific risks, and broader market downturns can impact newly listed companies more severely.

Before investing in an IPO, it is crucial to thoroughly research the company, read the prospectus carefully, evaluate the management team, understand the business model, and consider your own risk tolerance. Seeking professional advice and not investing solely on hype can help you make more informed decisions.

An IPO, or initial public offering, takes place when private businesses decide to issue shares in the primary market for the first time. The reasons for taking the IPO route are manifold. Some of the common reasons are: money needed to expand operations, repay debt, initial investors looking to sell their shares and getting into new ventures.

There are several benefits of issuing an IPO. Not paying interest on the capital raised and not having a deadline to repay a bank loan are some of the strong reasons why businesses choose the IPO option. There are basic differences while investing in an IPO and putting money in existing company stocks. The costs involved and the assessment required are some of the factors that differentiate the two types of investing.

Frequently Asked Questions (FAQs)

You can start with as little as ₹14,000–₹15,000, depending on the price band and lot size.

Yes, once the company is listed, you can sell your shares in the secondary market.

GMP indicates the expected listing price above the IPO issue price, based on unofficial trades.

It means more applications were received than shares available, indicating high demand.

This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.

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