What is an IPO? Full Form, Meaning & How It Works
- 2nd September 2026
- 12:30 AM
- 9 min read
IPO stands for initial public offering. It is the first sale of a company’s shares to the public.
Companies go public to raise capital for expansion, pay off debts, offer liquidity to early investors, fund new projects, and give promoters an exit opportunity. After an IPO, the company’s shares trade on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
India saw 106 IPOs in 2025. In 2026, it has already crossed that with 147 IPOs listed on the NSE and BSE.
What is an IPO?
An Initial Public Offering (IPO) is the process by which a private company sells shares to the public, raises equity capital, gets listed on a stock exchange, and becomes a public company. In other words, the company raises capital from angel investors, institutional investors, and the general public through the IPO.
Investors acquire ownership in proportion to the shares they hold. The capital raised belongs to the company, not the investment bank or underwriters, the financial institutions that manage the issue. If investor demand falls short of the shares on offer, it is called undersubscription. The underwriters are obligated to buy the rest of the shares. An IPO gives investors a shot at returns, either immediately if the listing goes well, or over time if they hold. On the other hand, the listing can also disappoint, and the share price can fall below the issue price.
Hence, it is essential as an investor to research and check the Red Herring Prospectus (RHP). A SEBI (Securities and Exchange Board of India) approved document every company must file before going public. It lists the price band, business details, financials, and risks such as pending litigation, customer or supplier concentration, high debt, and regulatory exposure.
Types of IPO
There are two types: Fixed Price IPOs and Book Building IPOs.
- Fixed price issue
The company also addressed as Issuer formally in the prospectus, and its underwriters fix the price per share after analysing its assets, liabilities, and financials. The offer document provides supporting data to justify the set price. Investors know the share price in advance and pay the amount in full with their application. However, demand for the shares is known only after the issue closes.
- Book building issue
The company sets a price range called the price band, a floor (lowest) price and a cap (highest) price, usually about 20% apart. You bid within this range, choosing how many shares you want and the price you’re willing to pay.
Once bidding closes, the final price, called the cut-off price, is set based on demand. Everyone pays this cut-off price. If you bid higher, you get the difference back. If you don’t get any shares (no allotment), your full amount is refunded. You can track demand each day while bidding is open.
How does a company go public?
- Board approval & appoint merchant bankers
The board approves the plan to go public, then appoints an investment bank and/or underwriters. They study the company’s financials and sign an underwriting agreement covering the amount to be raised and the securities to be issued.
- File the DRHP with SEBI
The company files a registration statement and Draft Red Herring Prospectus (DRHP) with SEBI. The DRHP covers financials, business and industry details, management, risk factors, and other mandatory disclosures.
- SEBI review
SEBI reviews the DRHP and either clears it or sends back observations for the company to resolve and refile. This review typically takes 2 to 4 months.
- RHP, Price Band & Roadshow
The company files the Red Herring Prospectus (RHP) with the price band and applies to list on the NSE, BSE, or both. Over the next one to two weeks, company execs and underwriters take the pitch to institutional investors, mainly Qualified Institutional Buyers (QIBs).
- Book building & bidding
The price is set by the fixed price method or book building. The company and its merchant bankers invite select QIBs to bid for the anchor book, the portion of shares set aside for anchor investors, up to 30% of the total issue. Those that accept and commit at least ₹10 crore get confirmed allotment a day before the issue opens to everyone else. Their shares then carry a lock-in : 50% releases after 30 days, the rest after 90 days. The public bidding window stays open for three to ten working days.
- Allotment & refunds
Once bidding closes, the registrar finalises allotment within one working day (T+1). Allotted shares are credited to demat accounts and excess or blocked funds are refunded by T+2.
- Listing on NSE & BSE
Shares list and begin trading by T+3, opening with a 45-minute pre-open session before regular trading starts at 10 a.m. The price can move up or down from the issue price on day one.
Benefits of Investing in IPO
- Early entry
An IPO lets you buy shares before the stock trades freely on the exchange, at a price fixed in advance.
- Potential listing gains
If the stock lists above its issue price, early investors can see a gain on listing day. This isn’t guaranteed, and plenty of IPOs list flat or below issue price. Some investors flip their shares, selling within days of listing to lock in a quick gain.
- Liquidity
Once listed, you can buy and sell the shares whenever you like on the stock market.
- Fair allotment for retail investors
SEBI reserves a portion of every IPO for retail investors, and each applicant can bid for at least one lot. If demand for that portion is more than the shares on offer, it’s called oversubscription. Allotment then runs through a computerised lottery system for fair allocation.
- Long-term wealth potential
If the company performs well after listing, shareholders benefit the same way they as with any other equity investment. Investors benefit from dividends, bonus shares, and long term appreciation.
Risks of Investing in IPO
- Listing day volatility
IPO shares can fluctuate within minutes after listing. For issues over ₹250 crore, the circuit limit, the maximum a stock is allowed to move in one session, stands at 20% on debut, wider than the usual market band. The share price can move well above or below the issue price on day one. Some IPOs carry a green shoe option, where underwriters buy shares back from the market to support the price for up to 30 days after listing, though this isn’t available on every issue and won’t hold up if selling pressure is heavy.
- Overvaluation risk
Strong demand can push a company to price its IPO higher than its financials justify. If the market later reassesses the business at a lower value, the share price corrects, and investors who bought in at the top take the loss.
- Weak quarterly results after listing
A newly listed company has no track record as a public entity. If its first quarterly results after listing fall short, the stock often reacts sharply, since there’s no earnings history yet to set a baseline.
- Limited information
Private companies disclose less than listed ones. Even with the DRHP and RHP, investors have less historical data to judge the company’s true financial position than they would for a stock that’s already listed.
- No guarantee of allotment
Applying for an IPO doesn’t mean you get the shares automatically. In a heavily oversubscribed retail category, allotment runs through a lottery system, and many interested applicants don’t get the allotment.
- Post-listing selling pressure
Anchor investors and other pre-IPO shareholders are locked in for a fixed period as per SEBI guidelines. Once that lock-in expires, they can sell in bulk, and that extra supply can push the stock price down.
How to apply for an IPO with PL Capital
You’ll need a PAN card and a demat account before you apply. Once that’s sorted, investing takes a few clicks.
- Log in to your PL Capital account – Investment Products
- Select the IPO you want to invest in and place your bid.
- Enter the number of lots and the price you’re willing to pay.
- Enter your UPI ID and submit.
- Complete the transaction on your UPI app by accepting the mandate request. This holds the amount in your account until shares are allotted, rather than debiting it upfront.
Outlook
Applying for an IPO comes with its own set of pros and cons, but as an investor, carefully weighing these risks can be the right move. Do your research well. If you’re not sure, the next best step is to talk to a financial advisor and read the news on the IPO. Explore upcoming IPOs on PL Capital.
Frequently asked questions
Q1. What is the difference between IPO and stocks?
An IPO is when a company sells shares to the public for the first time. A stock is what you actually buy, a small piece of ownership in the company. You can buy it during the IPO, or later on the exchange.
Q2. What is the difference between IPO and FPO?
An IPO is a company’s first share sale to the public. A follow-on public offering (FPO) is a further share sale by a company that’s already listed.
Q3. How many types of IPO are there?
There are two types. In a fixed price issue, the company sets the share price in advance, so you know exactly what you’ll pay. In a book building issue, the company sets a price range, and the final price is decided by investor demand.
Q4. What is a book building IPO?
Book building is how the company figures out the right price to sell shares at. It sets a price range, say ₹95 to ₹100, and investors bid anywhere within that. Once bidding closes, demand decides the final price everyone pays.
