• Wed. Jul 24th, 2024

How does an IPO work?


Aug 4, 2023
IPO work

The number of the latest IPOs getting listed in the Indian stock market is on the rise. Investing in a company’s public issue may maximise your wealth creation potential while simultaneously helping you diversify your investments. That said, before you invest in an IPO using your online trading app, you need to first know how it works.

How Does an IPO Work?

As an investor, understanding how an Initial Public Offer (IPO) works can help you make informed decisions when investing in the latest IPOs. So, here’s an overview of the IPO process that a company desirous of issuing its shares to the public for the first time has to follow.

1. Appointment of a Book-Running Lead Manager

Appointing a Book-Running Lead Manager (BRLM) is the first step of the IPO process. A BRLM is an entity, mostly an investment bank, responsible for assisting the company in making the public issue a success. The BRLM also helps the company determine the price, underwrites the issue and markets it to the public. Depending on the size of the issue, the company may choose to appoint just one lead manager or multiple lead managers.

2.  Due Diligence and Preparation of the Draft Red Herring Prospectus (DRHP)

The lead manager conducts extensive due diligence into the company and its affairs. The exercise involves analysing the various financial statements of the company, internal controls, business processes and corporate governance measures in place.

The lead manager uses the information gathered during the due diligence exercise to prepare the Draft Red Herring Prospectus (DRHP). The prospectus is a document containing extensive information about the company, its financials, business strengths and risks and details of the issue.

3. Filing of the Draft Red Herring Prospectus with the SEBI

The compiled Draft Red Herring Prospectus is filed with the Securities and Exchange Board of India (SEBI) for approval. The SEBI thoroughly analyses the DRHP and verifies the authenticity and veracity of the information contained in it. In the case of any mistakes or inconsistencies, the prospectus is returned to the company for rectification. On the other hand, if the SEBI is satisfied, it accords its approval for the public issue.

4. Marketing of the Initial Public Offer

Once the company gets approval from SEBI, it starts to market the issue with the assistance of the Book-Running Lead Manager. Advertisements are published in the newspaper and other websites to generate awareness and create investor demand. The marketing exercise may run for weeks, or in some cases, months.

5. Announcement of the Price Band and Filing of the Final Red Herring Prospectus

The company, along with the Book Running Lead Manager, sets the price band for the issue based on the level of investor demand and awareness. Necessary announcements regarding the price band and the issue opening and closing dates are made to the public via media releases. Simultaneously, the company also files the final Red Herring Prospectus with the SEBI and stock exchanges.

6. Subscription of the Issue

When the issue opens up for subscription on the notified day, interested investors start applying through online trading apps and Application Supported by Blocked Amount (ASBA). This goes on until the last day of the subscription period.

When applying for an IPO, an investor is required to enter the number of lots and the price at which they wish to apply for. The chosen price must be between the notified price band of the issue.

According to SEBI rules and regulations, an investor can only submit one IPO application under a given PAN. However, they’re free to cancel or modify their application as and when they want until the issue is formally closed for subscription.

7. Determination of the Cut-Off Price

Once the issue subscription period comes to a close, the company analyses all of the bids received from investors to determine the cut-off price. It is set by taking the weighted average price of all of the bids placed by the investors.

The cut-off price is then used to determine investors eligible for share allotment. For instance, if an investor’s bid is at or above the set cut-off price, they would be eligible for allotment. However, if their bid is below the cut-off price, they would be ineligible for allotment.

8. Allotment of Shares to Eligible Investors

The company then proceeds to allot shares by crediting the demat accounts of eligible investors. If the issue is oversubscribed, a situation where the bids exceed the number of shares being issued, shares are allotted on a pro-rata basis.

On the other hand, if the issue is undersubscribed, which is a situation where the bids are lower than the number of shares being issued, all eligible investors get full allotment. The remaining unsubscribed shares are taken by the Book-Running Lead Manager (BRLM) since they’ve underwritten the issue.

9. Listing of Shares on Stock Exchanges

A few days after allotment, the shares are listed on the stock exchanges for the first time. Upon listing, investors can freely purchase and sell the company’s shares without any restrictions.


As an investor, having a comprehensive understanding of how an IPO works is essential. It provides a foundation for making well-informed investment decisions. If you wish to invest in the latest IPOs, having a trading and demat account is essential. It can make the process of investing a lot easier and hassle-free.

Bajaj Financial Securities Limited offers a robust online trading app designed to make the investment process simpler and more efficient. The app’s intuitive user interface is easy to understand and navigate, whereas the multiple features are tailored to make investing in the latest IPOs as seamless as possible.

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