1. What is an IPO?
An Initial Public Offering (IPO) is the landmark process through which a privately held company issues shares of stock to the public for the first time. By doing so, the company transitions from being owned by a few private investors to being owned by the general public, and its shares are subsequently listed and traded on a stock exchange.
2. Why do Companies go Public?
Companies launch IPOs for several strategic reasons:
- Raising Capital: The primary reason is to raise significant funds to finance expansion, research, debt repayment, or infrastructure development.
- Liquidity for Founders & Early Investors: It allows founders, venture capitalists, and angel investors to monetize their early investments.
- Brand Visibility: Being a publicly traded company enhances prestige, public image, and credibility.
- Currency for Acquisitions: Public shares can be used to acquire other companies.
3. Mainboard vs SME IPO
| Feature | Mainboard IPO | SME IPO |
|---|---|---|
| Company Size & Profitability | Large scale, minimum 3 years of steady profitability required. | Small and Medium Enterprises, relaxed profitability norms. |
| Minimum Investment | ₹14,000 - ₹15,000 per lot. | ₹1,00,000 to ₹1,40,000 per lot. |
| Listing Exchange | NSE and/or BSE Mainboard. | NSE Emerge or BSE SME platforms. |
4. Understanding the Price Band and Cut-off Price
In a book-built IPO, the company offers a Price Band (e.g., ₹100 to ₹105). Investors must bid for shares within this range.
The Cut-off Price is the final issue price decided by the company after evaluating all bids. Retail investors are advised to check the 'Cut-off Price' option while bidding to ensure their application remains valid regardless of the final price decided within the band.
5. Investor Categories
Shares in an IPO are reserved for different types of investors:
- QIB (Qualified Institutional Buyers): Mutual funds, banks, and foreign portfolio investors (typically up to 50% reservation).
- NII (Non-Institutional Investors) / HNI: High Net-worth Individuals investing more than ₹2 lakhs (typically 15% reservation).
- RII (Retail Individual Investors): Everyday investors bidding up to ₹2 lakhs (typically 35% reservation).
6. Red Herring Prospectus (RHP)
The RHP is the most critical document for an IPO investor. Filed with SEBI, it contains exhaustive details about the company's business operations, financials, promoters, objectives of the issue, and potential risk factors. It does not contain the final issue price or quantity, which is why it is called a "Red Herring".
7. Allotment and Listing
Due to high demand, most good IPOs are oversubscribed, meaning investors demand more shares than are available. In the Retail category, if an IPO is oversubscribed, allotment happens via a computerized lottery system.
Once allotted, shares are credited to the investor's Demat account. A few days later, the shares officially list on the stock exchange, at which point they can be freely bought and sold.