The IPO Markets (Part 2)

Rajesh leans forward during their Bangalore coffee meetup, eyes wide.

“Priya, so companies go through all these funding rounds—angels, VCs, PE—and valuations keep shooting up. But why do they finally decide to go public and sell shares to random people like me? And what actually happens during an IPO?”

Priya grins.

“Exactly the right question. The IPO is not just another funding round—it's a completely different game. Let's pick up from where we left off in Part 1. Our diary-manufacturing company is now valued at ₹400 crore, profitable, growing fast, and ready for the next level. Here's why it (and most companies) eventually choose to list on the stock exchange.”

5.1 Overview

In the previous chapter, we saw how businesses raise money privately in stages. The IPO (Initial Public Offering) is when a company first sells shares to the general public through the stock exchanges (BSE/NSE).

It's a major transition: from private ownership to public company status.

This chapter explains the “why”, the key players (merchant bankers), the step-by-step process, what happens after listing, some important IPO terms, and a quick look at recent Indian examples.

5.2 Why Do Companies Go Public?

Priya lists the main reasons companies choose an IPO:

Raise very large amounts of capital: Private rounds top out at a few hundred crores. An IPO can raise ₹1,000–5,000+ crore easily because thousands/millions of retail + institutional investors participate. Our diary-making company might want ₹800–1,200 crore to build factories across India, enter exports, or acquire smaller brands.
Provide an exit route for early investors: Angels, VCs, and PE firms don't want to stay invested forever. An IPO lets them sell part or all of their stake at a high valuation → massive returns. Example: Early Zomato or Nykaa investors made 50–100× returns when they exited via IPO.
Get cheaper funding compared to debt: Big bank loans come with high interest + repayment pressure. Equity raised via IPO has no repayment obligation (though shareholders expect dividends/growth).
Increase brand visibility and credibility: Being a listed company means more media attention, trust from customers/suppliers, and easier to attract talent (ESOPs become valuable).
Create a market price for shares: Once listed, shares have a daily quoted price → helps in future fundraising, employee stock options, acquisitions (using stock as currency), etc.
Regulatory and governance discipline: Listed companies must follow strict SEBI disclosure rules, which result in better transparency and professionalism

Downsides? More regulation, quarterly results pressure, risk of share price volatility, land oss of some control. But for mature, high-growth companies, the benefits usually outweigh.

5.3 Merchant Bankers

Priya explains: “A company can't just file papers and launch an IPO. They hire merchant bankers (also called investment bankers or book-running lead managers). These are SEBI-registered experts who manage the entire IPO process.”

Key roles of merchant bankers:

Advise on IPO timing, price band, and size of issue
Prepare all documents (DRHP, RHP)
Market the IPO to big investors (QIBs like mutual funds, insurance companies)
Run the book-building process (collect bids)
Help get regulatory approvals from SEBI and exchanges
Stabilise the stock price in the first few days if needed (green-shoe option)

Famous merchant bankers in India: Kotak Mahindra Capital, Axis Capital, JM Financial, ICICI Securities, SBI Capital Markets, Goldman Sachs, Morgan Stanley (for big ones).

5.4 IPO Sequence of Events

The IPO process usually takes 6–12 months. Here's the simplified sequence:

Appointment of intermediaries → Merchant bankers, legal advisors, auditors, registrars.
Due diligence & drafting → Deep check of company finances, risks. Prepare DRHP (Draft Red Herring Prospectus) - the main document with all details.
SEBI approval → File DRHP with SEBI. SEBI reviews (1–3 months), suggests changes.
Final RHP + price band → After SEBI clearance, file Red Herring Prospectus with price band (e.g., ₹200–₹220 per share).
Anchor investor allocation (optional) → 1 day before public issue, big institutions (mutual funds, FIIs) get allotted shares at the upper price band.
Public issue opens → 3–5 days for subscription. Retail, NII, and QIB categories.
Book building → Bids collected. Final price decided based on demand (usually the upper band if oversubscribed).
Allotment → Registrar finalises who gets shares (lottery if oversubscribed in retail).
Listing → Shares start trading on BSE/NSE. Bell-ringing ceremony!

5.5 What Happens After the IPO?

The following are the events that usually happen after IPO:

Shares trade freely → Anyone can buy/sell on exchanges.
Company gets the money (minus expenses) → Used for stated purposes (expansion, debt repayment, etc.).
Lock-in periods → Promoters & pre-IPO investors can't sell immediately (usually 1–3 years for promoters).
Ongoing obligations → Quarterly results, annual reports, disclosures, analyst calls, compliance with SEBI LODR rules.
Stock price now reflects market sentiment → Can go up/down based on performance, news, and economy.

5.6 Few IPO Jargons

Priya quickly covers key terms Rajesh should know:

Price Band → Minimum & maximum price at which shares are offered.
Book Building → Process where investors bid; final price discovered.
Anchor Investors → Big institutions allotted shares a day early.
QIB → Qualified Institutional Buyers (mutual funds, banks, insurance).
NII → Non-Institutional Investors (high-net-worth individuals).
Retail Individual Investor → You and me (up to ₹2 lakh application).
Lot Size → Minimum shares you must apply for (e.g., 50 shares).
Grey Market Premium (GMP) → Unofficial premium in unofficial market before listing.
Listing Gains → Difference between issue price and listing price.

5.7 Recent IPOs in India

Priya pulls up her phone:

“Some recent successful ones include Zomato (2021), Nykaa (2021), Paytm (2021), LIC (2022), Tata Technologies (2023), IREDA (2023), and in 2024–2025, we've seen strong listings from companies like Ola Electric, Swiggy, FirstCry, Hyundai Motor India, and many SME IPOs. Most got good retail response when the story was strong and valuations reasonable.”

Key Insights

IPOs help companies raise huge amounts of capital and give early investors an exit.
Merchant bankers run the show—from paperwork to pricing to marketing.
The process takes months and involves SEBI approval, book building, and allotment.
After listing, the company becomes public with strict disclosure rules.
Know basic IPO terms like price band, anchor investors, QIB, and retail category.
Recent IPOs show strong investor interest when the business is solid.

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