Dalal Street: IPO (Initial Public Offering): Meaning, Types, Process, GMP, Risks & How to Apply
An IPO (Initial Public Offering) is the process through which a private company offers its shares to the public for the first time. By launching an IPO, a company raises capital from investors and becomes a publicly listed entity on stock exchanges such as NSE or BSE.
For investors, IPOs offer an opportunity to participate in a company’s growth at an early stage. However, not every IPO guarantees profits. Understanding how IPOs work, their types, risks, pricing methods, and market sentiment is essential before investing.
This page explains IPOs in a simple, practical, and investor-focused way, so you can make informed decisions.
What Is an IPO in the Stock Market?
An Initial Public Offering (IPO) is the first sale of shares by a private company to the public. Once listed, the company’s shares are freely traded in the secondary market.
Companies launch IPOs to:
- Raise funds for expansion or new projects
- Reduce debt
- Improve brand visibility and credibility
- Provide an exit option to early investors
For investors, IPOs can offer:
- Early access to potential growth companies
- Listing gains if demand is strong
- Long-term wealth creation opportunities
Before investing, investors should carefully read the IPO prospectus (DRHP), which discloses financials, business risks, objectives of the issue, and pricing details.
Also Read : India Trims US Treasury Exposure for First Time in Four Years, Holdings Down 21%
Types of IPO Issues
There are two primary methods through which IPOs are offered in India.
- Fixed Price Issue
In a Fixed Price Issue, the company decides a fixed price for its shares before the IPO opens.
Key features:
- Share price is known in advance
- Investors apply at the same fixed price
- Demand becomes visible only after the IPO closes
- Generally used by small and medium companies
This method is simpler but provides limited insight into real-time market demand.
- Book Building Issue
A Book Building Issue allows the share price to be discovered through investor bidding.
How it works:
- A price band (floor price to cap price) is announced
- Investors bid within this range
- Final price is decided based on demand
- More transparent and market-driven
Most large and popular IPOs in India follow the book-building method.
Fixed Price Issue vs Book Building Issue
| Aspect | Fixed Price IPO | Book Building IPO |
| Pricing | Fixed before issue opens | Discovered via bidding |
| Investor visibility | No demand visibility during issue | Demand visible during bidding |
| Transparency | Lower | Higher |
| Best suited for | Smaller companies | Large & established companies |
Main Board IPO vs SME IPO
Main Board IPO
Main Board IPOs are issued by well-established companies that meet strict eligibility criteria set by NSE or BSE, including profitability, net worth, and disclosure norms.
These IPOs usually attract:
- Institutional investors
- High subscription volumes
- Wider public participation
SME IPO
An SME IPO allows small and medium enterprises to raise capital through dedicated SME platforms of NSE or BSE.
Key points:
- Lower issue size
- Higher risk compared to main board IPOs
- Growth-oriented companies
- Liquidity may be lower post-listing
IPO GMP (Grey Market Premium) Explained
IPO GMP (Grey Market Premium) refers to the unofficial price at which IPO shares trade in the grey market before listing.
- Higher GMP = strong market sentiment
- Lower or negative GMP = weak demand
⚠️ Important:
GMP is unofficial and unregulated. It only reflects market sentiment and does not guarantee listing gains.
Can You Apply for IPO GMP?
No.
You cannot legally apply for GMP.
To invest in an IPO:
- Apply through your Demat account
- Use your broker or trading app
- Apply only during the official subscription period
GMP should be used only as a reference, not as the sole investment decision factor.
Advantages of Investing in IPOs
IPO investments can be rewarding when evaluated carefully.
Key benefits include:
- Early entry into growing companies
- Potential listing gains
- Portfolio diversification
- Liquidity after listing
- Market-driven valuation
Risks & Disadvantages of IPOs
Not all IPOs perform well.
Major risks include:
- Overvaluation leading to listing losses
- Limited historical performance data
- Market volatility
- High subscription hype without fundamentals
- Promoter dilution and reduced control
Always evaluate financials, business model, risks, and objectives before investing.
IPO Process in India (Step-by-Step)
- Appointment of investment bankers
- Filing of Draft Red Herring Prospectus (DRHP) with SEBI
- SEBI review and approval
- Price band announcement
- Roadshows and investor marketing
- IPO opens for public subscription (3–5 days)
- Basis of allotment
- Shares credited to Demat accounts or refund the invested amount
- Listing on NSE/BSE
Important IPO Terms You Should Know
- Issuer – Company offering shares
- DRHP – Draft prospectus filed with SEBI
- Price Band – Bidding range for shares
- Oversubscription – Demand exceeds supply
- Green Shoe Option – Additional shares to stabilize price
- Flipping – Selling shares immediately after listing
Eligibility to Apply for an IPO in India
To apply for an IPO, you must have:
- PAN card
- Demat account
- Bank account linked to Demat
NRIs, retail investors, HNIs, and institutional investors can apply through permitted channels.
Important for IPO investment
IPOs can offer exciting opportunities, but they also come with risks. Instead of relying only on GMP or market hype, investors should focus on business fundamentals, valuation, risks, and long-term prospects.
This page is designed to help you understand IPOs clearly before investing.
