How an IPO Works

An Initial Public Offering, or IPO, is the process through which a private company sells shares to the public for the first time, becoming a listed company whose stock can then be freely traded on an exchange. For the company, it's typically a way to raise capital for expansion, pay down debt, or provide an exit for early investors and founders. For investors, it's a chance to buy into a company at the moment it opens up to public ownership.

The process begins with the company hiring investment banks (called book-running lead managers in this context) to help structure the offering, prepare a detailed prospectus disclosing the business, financials and risks, and set a price range for the shares. This prospectus — called the Red Herring Prospectus in India — is publicly available and is, frankly, the single most useful document an investor can read before deciding whether to apply, since it contains far more detail than the marketing buzz that typically surrounds a high-profile listing.

Most IPOs in India use a book-building process: the company sets a price band (say, 95 to 100 rupees per share) rather than a single fixed price, and investors bid within that range over a specified subscription window, typically three to five days. The final price is determined based on the demand received across different investor categories — retail investors, qualified institutional buyers, and high-net-worth individuals each have separate allocation quotas.

Once the subscription window closes and shares are allotted (which, for oversubscribed IPOs, happens through a lottery-like process for retail investors since demand exceeds available shares), the stock lists on the exchange, usually within about a week, and begins trading freely, its price now determined by ordinary buying and selling rather than the fixed book-building process that set its issue price.