An Initial Public Offering (IPO) is the "Graduation Day" for a private company. It is the first time the general public—people like you and me—are invited to buy a piece of the business. Before an IPO, a company's shares are usually held by its founders, employees, and early-stage professional investors (Venture Capitalists). By going public, the company enters the global stage of the Secondary Market.
But an IPO isn't just a simple "for sale" sign. It is a highly regulated, month-long journey involving banks, lawyers, and regulators to ensure that the transition is fair and the company’s secrets are revealed to potential owners.
1. Why Does a Company Go Public?
Going public is a massive headache for management—they have to disclose their profits every 3 months and face constant criticism from the market. So why do they do it?
- Raising Capital: This is the primary reason. To build a new airport, research a cure for cancer, or expand to 50 countries, companies need billions of dollars. Equity capital doesn't require interest payments.
- Exit for Early Investors: The founders and VCs have worked for 10 years without a "payday." An IPO allows them to sell some of their shares to the public and turn their "paper wealth" into real cash.
- Prestige & Visibility: Being a "Listed Company" provides a level of trust. It is easier to hire top talent and negotiate with international suppliers when your name is on the NSE or BSE.
2. The Journey: From DRHP to Listing
The process starts long before you see the "Apply Now" button on your broker's app.
3. Who Gets the Shares? (The Quota System)
Not everyone is treated equally in an IPO. Regulators ensure that small retail investors aren't crowded out by massive banks. The shares are usually divided into three buckets:
- QIB (Qualified Institutional Buyers): Massive banks, mutual funds, and insurance companies. They provide the "stability" to the IPO.
- NII / HNI (Non-Institutional Investors): Wealthy individuals or companies who bid for more than ₹2 Lakhs worth of shares.
- Retail Individual Investors: People like us who bid for less than ₹2 Lakhs. In India, if a retail quota is oversubscribed, shares are allotted via a Lucky Draw (Lottery).
4. Essential IPO Terminology
To evaluate an IPO, you need to speak the language:
| Term | Definition |
|---|---|
| Lot Size | The minimum number of shares you must buy. You can't buy 1 share; you must buy 1 "Lot" (e.g., 25 shares). |
| Book Building | The process where the market determines the price based on demand during the bidding period. |
| Oversubscription | When investors want to buy more shares than are available. (e.g., "10x subscribed" means 10 people want every 1 share). |
5. The Dark Side: Risks of IPOs
Don't be fooled by the hype. Not every IPO is a success.
- Lack of History: Unlike established companies, you only have the company's own word (the Prospectus) to rely on. You don't know how they behave during a market crash.
- Over-Valuation: Investment bankers are paid to get the highest price for the company. Sometimes, they set a price so high that the stock crashes the moment it starts trading.
- The "Hype" Trap: When your taxi driver and your neighbor are both talking about an IPO, it might be a bubble. Always read the financials!
Summary of Module 04
- An IPO is the process of a private company selling shares to the public.
- The DRHP is the single most important document to read before investing.
- The Lottery system determines retail allotment in oversubscribed IPOs.
- Listing gains are exciting, but Fundamental Analysis is required for long-term wealth.
Once the IPO is finished and the stock is listed, it begins its life on the exchange. But who are the people actually clicking the "buy" and "sell" buttons every day? In the next module, we meet the Market Participants.