What is an IPO?
An Initial Public Offering (IPO) is the process where a private company offers its shares to the general public for the first time. Think of it like this: imagine you’ve been running a successful bakery business with a few partners. Now, you want to expand nationwide, but you need more money. Instead of taking a bank loan, you decide to invite everyday people to become part-owners of your bakery by buying shares. That’s essentially what an IPO does!
When a company “goes public” through an IPO, it transforms from being owned by a small group (founders, venture capitalists, early investors) to being partially owned by thousands or even millions of public shareholders.
Types of IPOs
1. Fixed Price IPO
In this type, the company sets a specific price for its shares before the IPO launches. Investors know exactly what they’ll pay per share. Once the IPO closes, the actual demand becomes clear.
Example: If XYZ Company sets its IPO price at ₹100 per share, every investor pays exactly ₹100, regardless of demand.
2. Book Building IPO
Here, the company offers a price range (called the price band) instead of a fixed price. For example, shares might be priced between ₹90-₹110. Based on investor demand during the bidding period, the final price is determined.
Example: If most investors bid at ₹108, that might become the final issue price.
3. Fresh Issue
The company creates brand new shares and sells them to raise capital. This money goes directly to the company for expansion, debt repayment, or other business needs.
4. Offer for Sale (OFS)
Existing shareholders (like promoters or early investors) sell their shares to the public. In this case, the money goes to those selling shareholders, not to the company.
Most IPOs are a combination of both Fresh Issue and OFS.
Important IPO Terms You Must Know
1. Prospectus/Red Herring Prospectus (RHP) A detailed document containing everything about the company—its business model, financials, risks, management team, and how it plans to use the IPO money. Think of it as the company’s resume.
2. Issue Price The price at which shares are offered to the public during the IPO.
3. Lot Size The minimum number of shares you must buy. You can’t buy just one share; you must buy at least one lot. For example, if the lot size is 14 shares at ₹1000 each, your minimum investment is ₹1,4000.
4. Underwriters Investment banks or financial institutions that help the company conduct the IPO. They guarantee that the company will raise the minimum required capital by buying unsold shares if needed.
5. Listing Date The day when the company’s shares start trading on stock exchanges like BSE (Bombay Stock Exchange) or NSE (National Stock Exchange).
6. Cut-off Price In book building IPOs, retail investors can bid at the “cut-off price,” meaning they agree to pay whatever final price is determined.
7. Oversubscription When the demand for IPO shares exceeds the number of shares available. For example, if 1 crore shares are available but applications come for 5 crore shares, the IPO is 5x oversubscribed.
8. Allotment The process of distributing shares to investors. When an IPO is oversubscribed, shares are allotted through a lottery system for retail investors.
9. Grey Market Premium (GMP) The unofficial price at which IPO shares trade before they’re officially listed. It’s an indicator of expected listing gains but isn’t always accurate.
10. Anchor Investors Large institutional investors (mutual funds, insurance companies, foreign investors) who get shares before the IPO opens to the public. They bring credibility to the offering.
IPO Charges and Fees: What You’ll Pay
For Investors:
- Transaction Charges: Minimal charges by stock exchanges (usually a few rupees)
- DP (Depository Participant) Charges: Around ₹10-₹25 when shares are credited to your demat account
- GST: Applicable on transaction charges (18%)
- No Brokerage: Most brokers don’t charge brokerage for IPO applications
Total Cost for Investors: Typically ₹15-₹50 for an IPO application, which is negligible.
For Companies:
- Underwriting Fees: 2-3% of the total amount raised
- Legal and Regulatory Fees: ₹50 lakhs to ₹2 crores
- Marketing and Advertising Costs: ₹1-5 crores
- Listing Fees: Paid to stock exchanges
Companies typically spend 5-7% of the IPO proceeds on these expenses.
IPO vs NFO in Mutual Funds: Key Differences
| Aspect | IPO (Initial Public Offering) | NFO (New Fund Offer) |
|---|---|---|
| What is it? | First-time sale of company shares | Launch of a new mutual fund scheme |
| Who issues? | Private companies going public | Mutual fund companies |
| Price | Market-driven, can fluctuate | Fixed at ₹10 per unit |
| Risk Level | Higher (single company risk) | Lower (diversified portfolio) |
| Management | You own shares directly | Fund manager manages your money |
| Returns | Can be very high or result in losses | Moderate, depends on fund performance |
| Liquidity | Can sell anytime after listing | Can redeem anytime after NFO closes |
| Research Required | Extensive (company analysis) | Moderate (fund house reputation, strategy) |
| Purpose | Company raises capital | Fund house launches new investment product |
Capitalment Simple Example: Buying an IPO is like buying a specific car (you own that exact vehicle). Buying an NFO is like joining a carpool service (a professional driver manages multiple vehicles for you).
Pros and Cons of Investing in IPOs
Advantages (Pros)
1. Potential for High Returns If you invest in a good company at the right price, listing gains can be substantial. Some IPOs have given 50-100% returns on the very first day!
2. Ownership in Growing Companies IPOs often represent companies in high-growth phases. You become a part-owner during their expansion journey.
3. Long-term Wealth Creation Companies like Infosys, HDFC Bank, and Asian Paints went public decades ago. Early investors made fortunes.
4. Portfolio Diversification IPOs allow you to diversify your investment portfolio with new sectors and industries.
5. Transparent Pricing Unlike secondary markets where prices fluctuate constantly, IPO prices are set through a fair process.
6. Democratic Access Anyone with a demat account and minimum investment amount can participate.
Disadvantages (Cons)
1. High Risk and Uncertainty Many IPOs list below their issue price, causing immediate losses. Without a trading history, it’s hard to judge fair value.
2. Limited Financial History Many companies going public have only 3-5 years of financial data. Predicting long-term performance is challenging.
3. Lock-in Periods Promoters and early investors often have lock-in periods, but they can sell massive quantities after that, potentially crashing the price.
4. Market Sentiment Dependent Even good companies can list poorly if overall market conditions are bad.
5. Overpricing Risk Companies and underwriters sometimes overprice IPOs to maximize fundraising, leaving little upside for public investors.
6. Allotment Uncertainty In oversubscribed IPOs, you might not get any shares, or get fewer than you applied for.
7. Company May Not Be Profitable Many tech startups go public while still making losses, betting on future profitability that may never materialize.
A Brief History of IPOs
Global History
The concept of IPOs dates back to 1602 when the Dutch East India Company became the first company to issue shares to the public on the Amsterdam Stock Exchange. This revolutionary idea allowed companies to raise capital from common citizens.
In the 1900s, the IPO market exploded in the United States. The 1990s saw the “dot-com boom” where technology companies rushed to go public, with mixed results.
Indian History
India’s IPO market began in the 1980s but truly took off in the 1990s after economic liberalization in 1991.
Key Milestones:
- 1993: Infosys IPO at ₹95 per share (now worth several thousand rupees after splits)
- 2004: Tata Consultancy Services (TCS) IPO – one of India’s largest at that time
- 2010: Coal India IPO – ₹15,000+ crore, the largest in India then
- 2021: Paytm IPO – ₹18,300 crore, one of India’s largest but listed at a loss
- 2022: LIC IPO – ₹21,000 crore, India’s biggest IPO ever
The Securities and Exchange Board of India (SEBI), established in 1992, regulates IPOs to protect investor interests.
Live Example: Zomato IPO (2021) – A Detailed Case Study
Let Capitalment walk you through the Zomato IPO, one of India’s most talked-about public offerings.
Company Background
Zomato started in 2008 as a restaurant discovery platform and evolved into a food delivery giant. By 2021, it was losing money but had massive growth potential.
IPO Details
- Issue Date: July 14-16, 2021
- Issue Size: ₹9,375 crore
- Price Band: ₹72-₹76 per share
- Final Issue Price: ₹76
- Lot Size: 195 shares
- Minimum Investment: ₹14,820 (195 shares × ₹76)
- Listing Date: July 23, 2021
Components
- Fresh Issue: ₹9,000 crore (for business expansion)
- Offer for Sale: ₹375 crore (existing shareholders selling)
Subscription Details
The IPO was oversubscribed 38.25 times!
- Retail investors: 7.45 times
- Qualified Institutional Buyers: 51.79 times
- High Net Worth Individuals: 33.28 times
This massive oversubscription meant many retail investors received fewer shares than they applied for.
Purpose of Funds
Zomato planned to use the money for:
- Expanding Zomato’s food delivery business
- Investing in Grofers (now Blinkit) for quick commerce
- Developing Hyperpure (B2B supply business)
- General corporate purposes
Listing Day Performance
Opening Price: ₹116 (52.6% premium over issue price!)
- Investors who got allotment made instant profits
- Market capitalization: Over ₹1 lakh crore
Post-Listing Journey
- First few months: Stock remained above ₹100
- 2022: Crashed to ₹40 due to global tech selloff and profitability concerns
- 2023-2024: Recovered as company moved toward profitability
- Current scenario (as of my knowledge): Trading around ₹150-200 range
Key Learnings from Zomato IPO
What Went Right:
- Strong brand recognition
- Large addressable market
- First mover advantage in India’s food-tech space
- Listing gains for early investors
What Went Wrong:
- Company was loss-making at IPO
- Valuation concerns emerged post-listing
- Investors who bought at peak (₹150+) faced significant losses
- Intense competition from Swiggy
Investor Outcomes
- Short-term traders (sold on listing day): 50%+ profit
- Those who held for 6-12 months: Losses (stock crashed)
- Long-term investors (held 2+ years): Depends on entry and exit points
This example perfectly illustrates both the opportunities and risks in IPO investing.
Capitalment Expert Point of View on IPO Investing
After analyzing hundreds of IPOs over the years, here’s my honest perspective:
IPOs Are NOT Guaranteed Money-Makers
The popular belief that “IPOs always give listing gains” is a dangerous myth. For every successful IPO like Zomato or Nykaa, there are failures like Paytm (listed 27% below issue price) or Burger King India.
The “New Age Tech” IPO Trap
Between 2021-2022, India saw a flood of loss-making tech companies going public, riding the startup hype. Most disappointed investors.
Capitalment advice: Be extra cautious with companies that have no clear path to profitability. Revenue growth means nothing without eventual profits.
Grey Market Premium is Misleading
Capitalment have seen investors make decisions solely based on GMP, which is just speculation. The actual listing can be completely different. Never rely on GMP as your primary research tool. Always do you own research before investing in any IPO.
Read the Red Herring Prospectus
I know it’s boring and 400 pages long, but at least read:
- Risk factors section
- Objects of the issue (how they’ll use the money)
- Last 3 years’ financial statements
- Management background
The “Listing Gain” Gamble vs Long-term Investing
For Listing Gains: You need luck, market sentiment, and timing. It’s essentially short-term gambling.
For Long-term Wealth: Focus on business fundamentals. Ask yourself: “Will this company still be relevant and profitable 10 years from now?”
Capitalment personally prefer the second approach. Capitalment know some people whose best returns came from IPOs they held for 5+ years, not ones that they sold on listing day.
Price Matters More Than the Company
Even a great company can be a bad investment if you overpay. This is why I skip many IPOs—not because companies are bad, but because they’re overpriced.
Capitalment IPO Checklist (What Capitalment Look For)
✅ Company is profitable or has a clear path to profitability
✅ Reasonable valuation (compare with listed peers)
✅ Strong competitive moat (something unique others can’t easily copy)
✅ Experienced management team with skin in the game
✅ Large addressable market with growth potential
✅ Transparent business model
✅ Reasonable amount going to promoters as OFS (if >50% is OFS, be cautious)
The Diversification Rule
Never put more than 5-10% of your investment portfolio into IPOs. They’re high-risk, and you need a diversified approach with established stocks, mutual funds, and safer assets.
SEBI’s Reforms Are Helping
Recent regulations like shorter listing timelines (from weeks to days), transparent allotment processes, and stricter disclosure norms have made the IPO market fairer for retail investors.
Should You Invest in IPOs? Capitalment Final Thoughts
IPOs can be an exciting way to participate in India’s growth story and potentially earn good returns. However, they require:
- Thorough research
- Risk appetite
- Patience (for long-term investing)
- Emotional discipline (to not get swayed by hype)
Capitalment Golden Rule: Only invest in IPOs of businesses you understand and would be comfortable owning for at least 3-5 years. If you wouldn’t hold it long-term, don’t buy it for listing gains either—that’s pure speculation.
For beginners, Capitalment recommend starting with established stocks or diversified mutual funds before venturing into IPOs. Gain experience in reading financial statements, understanding business models, and handling market volatility first.
Remember, the stock market rewards patience and punishes impatience. IPOs are just one tool in your investment toolkit—use them wisely!
Very good