How Does an IPO Work for Investors in India?

3 min read | Updated on November 26, 2025, 11:05 IST

How Does an IPO Work for Investors in India?

The capital markets in India remain highly active, as an increasing number of private companies consider and complete Initial Public Offerings (IPOs) to raise capital for growth and liquidity for existing shareholders.

While IPOs have traditionally been associated with large public companies, the development of private markets is allowing companies in the technology, finance, manufacturing and consumer sectors to enter public markets more regularly to finance their accelerated growth and establish a core presence in their respective markets.

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Industry experts note that an IPO is more than just a means of raising capital, an IPO represents one of the most important phases for a company to transition from private ownership to public scrutiny, accountability and increased chance for growth.

Understanding IPOs

An Initial Public Offering, referred to as an IPO, involves a private entity selling its shares to the public for the first time. To buy shares, retail and institutional investors become owners of the private business, converting it from private to public ownership and extending its ownership base of investors.

Any funds raised from the IPO can be used for a number of general purposes, including expanding the business, funding new initiatives, paying down debt, and any other future endeavours or purposes referenced in the company’s offering memorandum.

Investors have the potential to earn attractive returns when they purchase in an IPO as long as the IPO reflects strong underlying fundamentals and future growth opportunities.

IPO Process Overview

The initial public offering (IPO) process consists of several organised and systematic steps to achieve transparency, legality of the process, and marketing efficiency.

Step 1: Engaging Underwriters

Companies generally hire investment banks/institutions or underwriters to assess their financial needs, determine the pricing, and guide the company through its IPO filing.

Step 2: Filling DRHP with SEBI

The company prepares a Draft Red Herring Prospectus (DRHP), which includes detailed financial information, risk factors and where applicable, the company’s operations. This DRHP is then submitted to SEBI for review.

Step 3: Stock Exchange Approval

Companies obtain in-principle approval from the stock exchanges on which they want to be listed. After getting consent from the SEBI, the company submits its final Red Herring Prospectus (RHP), commencing its IPO.

Step 4: Marketing and Roadshows

The company organises roadshows to entice investors, showcasing its business potential and growth plans. Also, during this time, a price band for the shares is announced.

Step 5: IPO Subscription

The IPO opens for bidding, typically lasting from three to twenty-one days for retail investors to apply online/offline through brokers or banks. To apply, investors must have a PAN card and a Demat account.

Step 6: Allocation of Shares

Once the subscription period closes, shares are allotted based on demand and SEBI guidelines. In the case of oversubscription, allocation may follow a pro-rata basis or a lottery system. Shares are credited to the investors’ Demat accounts, while unsuccessful bids are refunded.

Step 7: Listing and Secondary Market Trading

Once shares have been allotted, they are listed on the chosen stock exchange for trading to buy and sell freely in the secondary market.

Why Do Companies Go Public?

Not all companies can secure sufficient capital from private investors. Public offerings not only unlock a larger pool of funds but also provide additional advantages:

Access to Capital

IPOs provide companies with large amounts of capital to fund the expansion of operations or invest in new projects.

Credibility and Visibility

Listing on a recognised stock exchange enhances a company’s reputation, signalling accountability and stability to investors and partners.

Exit Route for Investors

IPOs provide early-stage investors, including founders and venture capitalists, an opportunity to sell their shares, usually at considerable profits.

Leverage for Finance and M&A

Publicly traded companies can obtain loans at lower rates than some private companies, and they can even use their shares as currency in M&A markets.

Public Sentiment

The market valuation of & IPO may provide clues to the level of public sentiment regarding capital investments in the company's future.

Regulatory Oversight by SEBI

IPO activity across the country is controlled by the Securities and Exchange Board of India (SEBI). If a company wants a public listing, it must meet the strict standards and adhere to the rules set out by SEBI.

Eligibility Criteria for Filing an IPO

As per the SEBI guidelines, companies that are planning to go public have to fulfil the following requirements:

Net Tangible Assets: The company should possess net tangible assets worth at least ₹3 crore each of the last three years. Virtual assets, like shares, do not apply.

Operating Profit: The company must have an operating profit of at least ₹15 crore in at least three of the last five years.

Limit on IPO Size: The Issue cannot be greater than five times the company's fair value.

If a company does not meet these conditions, a company can still request approval for a book-building IPO, but at least 75% of the stocks must be sold to Qualified Institutional Investors (QIIs). If the company fails to meet these obligations, SEBI will cancel the IPO and return the funds to investors.

SEBI's process is in place to protect investors while ensuring growth-focused companies are not blocked from accessing the public capital markets unnecessarily.

Conclusion

IPOs represent a vital opportunity for companies to raise capital, build brand awareness, and provide exits for early investors. SEBI allows for effective regulatory oversight, balancing investor protection and opportunity.

The entire process, from filing the prospectus to offering the equity to specifying conditions for allotment and listing, provides systematic access to equity for investors interested in both emerging and established businesses.

About Author

Dev Sethia

Sub-Editor

a journalism post-graduate from ACJ-Bloomberg with over three years of experience covering financial and business stories. At Upstox, he writes on capital markets and personal finance, with a keen focus on the stock market, companies, and multimedia reporting. When he’s not writing, you’ll find him on the cricket pitch