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📖 Chapter 2 (Part 3): What is an IPO and How Does It Work?
🔹 Introduction:
Every big company you know — like Infosys, Reliance, Zomato, or LIC — once started as a private company. At some point, they needed more money to grow. Instead of taking loans, they decided to sell a part of their ownership to the public.
This process of selling shares to the public for the first time is called an IPO (Initial Public Offering).
In simple words:
👉 IPO is the gateway for companies to enter the stock market.
👉 It’s also the gateway for investors to become part-owners of a company before it becomes big.
🔹 What is an IPO:?
IPO (Initial Public Offering) is the process through which a private company becomes public by offering its shares to common investors for the first time.
- “Initial” – First time
- “Public” – General investors
- “Offering” – Selling shares
Once the IPO is done, the company’s shares are listed on a stock exchange (like NSE or BSE), and people can trade them freely.
🔹 Why Do Companies Launch IPOs:?
- Raise Capital: To fund new projects, expansion, or repay debt.
- Brand Visibility: Being listed improves credibility and trust.
- Liquidity for Founders & Early Investors: They can sell part of their holdings.
- Public Participation: Allows ordinary people to invest and share profits.
Example:
- Zomato launched its IPO in 2021 to raise ₹9,375 crore.
- It used the money for expansion, marketing, and technology development.
🔹 How Does an IPO Work:?
(Step-by-Step)
- Company Decision
- The company decides to go public and hire investment bankers.
- Filing DRHP (Draft Red Herring Prospectus)
- A document submitted to SEBI (regulator) containing company details, financials, and plans.
- SEBI Approval
- SEBI checks if all regulations and disclosures are correct.
- Price Band & Lot Size Announcement
- Company decides the price range per share (e.g., ₹90–₹100) and minimum number of shares per lot.
- Subscription Period (3–5 days)
- Investors apply for shares via brokers, banks, or UPI apps.
- Allotment Process
- If demand is higher than supply (oversubscribed), shares are allotted by lottery.
- Listing on Exchange
- After allotment, shares are listed on NSE/BSE and available for trading.
🔹 Example: LIC IPO (2022)
- Issue Size: ₹21,000+ crore (India’s biggest IPO)
- Price Band: ₹902–₹949 per share
- Subscription: Oversubscribed 3x
- Listing: May 17, 2022 on NSE & BSE
Investors who got shares during the IPO could sell them on listing day or hold them for the long term.
🔹 IPO vs Post-Listing Trading:
| Feature | IPO (Primary Market) | Stock Trading (Secondary Market) |
|---|---|---|
| Where | Company → Investors | Investor ↔ Investor |
| Price | Fixed or book-built | Fluctuates with demand & supply |
| Money Goes To | Company | Existing investor selling shares |
| Risk | Listing gain/loss possible | Market fluctuations daily |
🔹 Real-Life Analogy:
- IPO = Buying a car directly from the manufacturer before it hits the showroom.
- Secondary market = Buying the same car from someone else after it’s released.
🔹 Types of IPO Investors:
- Retail Investors: Individuals investing up to ₹2 lakh.
- HNI (High Net-worth Individuals): Large individual investors.
- QIB (Qualified Institutional Buyers): Mutual funds, insurance companies, etc.
🔹 Interesting / Lesser-Known Facts:
- The first IPO ever was by the Dutch East India Company in 1602.
- IPOs can be oversubscribed 100+ times (e.g., Paras Defence IPO ~304x).
- Not all IPOs make money — some list below issue price.
- IPO success depends on market sentiment + company fundamentals.
🔹 Q&A Section
Q1: Can I sell my IPO shares immediately after listing?
A: Yes. Once listed, you can sell them like any other stock.
Q2: Will I always get IPO shares if I apply?
A: No. If oversubscribed, allotment is done through a lottery system.
Q3: Are IPOs guaranteed profit?
A: No. Some IPOs list at a discount. Always check fundamentals before applying.
Q4: Minimum money required to apply?
A: It depends on the lot size, usually ₹10,000–₹15,000.
Q5: Can companies launch multiple IPOs?
A: Only once. After that, they can raise funds via FPO (Follow-on Public Offer).
🔹 Key Takeaways
- IPO = company’s first public share sale
- Helps companies raise funds & investors become shareholders
- Process involves DRHP, subscription, allotment, and listing
- IPO success depends on company strength + market demand
- Always check fundamentals before applying
✅ This is a complete, blog-ready draft for Chapter 2 (Part 3): What is an IPO and How Does It Work? – beginner-friendly, example-rich, and with Q&A.