An initial public offering marks a company’s transition from private ownership to public participation. It is not a marketing milestone or a price rally event. It is a structural change in how a business raises capital, reports performance, and remains accountable. For Indian investors, understanding an initial public offering matters because the process, risks, and outcomes differ significantly from regular secondary market trading. This guide explains IPOs in clear terms, without jargon, so you can understand how they work, why companies choose them, and what you need before applying. 

What is an initial public offering? 

An initial public offering is the process through which a privately held company offers its shares to the public for the first time and lists them on a recognised stock exchange. Before this step, ownership remains restricted to founders, early investors, and private stakeholders. After the IPO, ownership expands to include retail and institutional investors. 

From a financial standpoint, an IPO allows a company to raise capital directly from public investors. From a regulatory angle, it introduces mandatory disclosures, stricter reporting standards, and ongoing compliance requirements. After listing, the company’s shares are traded openly in the secondary market, where prices fluctuate based on investor demand, company performance, and overall market trends. Investors often track an upcoming IPO to identify new opportunities and evaluate potential growth prospects before the shares begin trading. 

Why do companies go for an IPO 

Companies choose an initial public offering for practical reasons rather than prestige. The most common reason is capital raising. IPO proceeds help businesses fund expansion, reduce debt, invest in infrastructure, or support long-term growth plans. Unlike loans, this capital does not require repayment. 

An IPO also provides liquidity to early investors. Founders and private equity investors can gradually exit or partially monetise their holdings. Listing further improves corporate credibility, transparency, and access to future fundraising avenues. However, companies also accept higher scrutiny, compliance costs, and public accountability once they list. 

How the IPO process works in India 

The IPO process in India follows a defined regulatory framework governed by the Securities and Exchange Board of India. It begins with the appointment of intermediaries, including merchant bankers, legal advisors, auditors, and registrars. These parties prepare the draft red herring prospectus, which outlines the company’s business, risks, financials, and objectives. 

After SEBI review and approval, the company announces the issue details, including price band, issue size, and dates. Investors apply during the subscription window. Once the issue closes, the registrar finalises allotment based on demand. Successful applicants receive shares in their demat accounts, and the company lists on the exchange. 

Understanding the IPO price band 

The price band represents the range within which investors can apply for shares. The lower end reflects the minimum acceptable price, while the upper end represents the maximum. Investors place bids within this range based on their assessment of the company’s valuation and prospects. 

The final issue price, called the cut-off price, depends on demand across investor categories. Retail investors may choose the cut-off option, indicating willingness to accept the final discovered price. Price bands aim to balance issuer expectations with market appetite rather than guarantee post-listing performance. 

Who can invest in an IPO? 

In India, IPOs divide investors into categories. Retail individual investors apply for shares up to a specified monetary limit. Non-institutional investors apply above this threshold, while qualified institutional buyers include mutual funds, insurance companies, and foreign institutional investors. 

Each category receives a reserved portion of the issue. Allotment follows a proportionate or lottery-based method when demand exceeds supply. This structure ensures broader participation while maintaining institutional stability during price discovery. 

The role of demat account opening in IPO investment 

A demat account is mandatory for IPO participation in India. Physical share certificates no longer exist. Demat account opening allows investors to hold securities electronically, ensuring safety, transparency, and faster settlement. 

Without a demat account, an investor cannot apply for an IPO or receive allotted shares. The demat account links to a trading account and a bank account, enabling seamless fund movement and share credit. Completing the demat account opening before the IPO window opens avoids last-minute delays. 

How to apply for an IPO 

Investors apply for IPOs through online banking platforms or trading apps using the Application Supported by Blocked Amount system. Under ASBA, the application amount remains blocked in the bank account instead of being transferred immediately. 

You select the number of shares, choose a bid price or cut-off, and submit the application. Funds unblock automatically if shares are not allotted. This system protects investor funds and simplifies refunds without manual intervention. 

What happens after allotment 

Once allotment finalises, shares are credited directly to the demat account of successful applicants. The company then lists its shares on the stock exchange on a predetermined date. On listing day, trading begins, and the share price fluctuates based on market demand. 

Listing gains or losses depend on multiple factors, including market sentiment, company fundamentals, and overall economic conditions. Investors should avoid equating listing day performance with long-term business value. 

Risks involved in IPO investments 

Initial public offerings carry specific risks. Limited historical trading data makes price discovery uncertain. Valuations may appear attractive during bullish markets, but correct post-listing. Business risks disclosed in the prospectus may materialise over time. 

Retail investors should read offer documents carefully, assess financial health, and avoid investing solely based on hype. An IPO represents ownership in a business, not a guaranteed short-term return opportunity. 

IPO vs secondary market investment 

IPO investing differs from secondary market investing in timing and information availability. In IPOs, investors evaluate a company before market pricing stabilises. In secondary markets, investors rely on price history, quarterly results, and analyst coverage. 

Both avenues serve different objectives. IPOs offer early access, while secondary markets provide clearer valuation signals. A balanced investment approach considers both rather than favouring one exclusively. 

Things to check before applying for an IPO 

Before investing, review the company’s business model, revenue sources, profitability trends, and debt levels. Analyse how the company plans to use IPO proceeds. Check promoter background, corporate governance standards, and industry outlook. 

Avoid relying on subscription numbers alone. High demand does not eliminate business risk. Informed decision-making improves outcomes more than chasing popular issues. 

Conclusion 

An initial public offering is a gateway through which private companies enter public markets and invite shared ownership. For Indian investors, understanding how IPOs work, why companies launch them, and how demat account opening fits into the process is essential. IPOs are neither shortcuts to quick profits nor events to ignore. They are structured financial mechanisms that reward clarity, discipline, and long-term thinking. Informed participation always matters more than timing the crowd. 

Author Bio: Tanmay is a finance content writer specialising in mutual funds, tax planning, and long-term investment strategies.