What is an IPO? Meaning, Types, and Benefits Explained
Every few weeks, you hear about a new company launching its IPO. Some IPOs make headlines for listing at 50% profit on day one. Others quietly list below their issue price. But before you decide whether to apply or skip. You need to understand what an IPO actually is and how it works. This guide covers everything from the basic meaning of IPO to how it works in India, the different types of IPOs, why companies go public, and what it means for you as an investor.
What is an IPO? Meaning and Definition
IPO stands for Initial Public Offering.
An IPO is the process by which a private company sells its shares to the general public for the first time through the stock market. Before an IPO, a company is privately owned by its founders, family members, angel investors, or venture capital firms. The general public cannot buy or sell shares of this company.
When the company decides to go public through an IPO, it offers a portion of its shares to the public. Anyone with a demat account whether a small retail investor or a large institution can apply for these shares.
After the IPO, the company gets listed on stock exchanges like NSE (National Stock Exchange) or BSE (Bombay Stock Exchange). From that point, its shares can be freely bought and sold in the market every trading day.
In simple words:
A private company becomes a public company through an IPO. Investors get a chance to own a piece of that company by buying its shares.
How Does an IPO Work?
Here is the basic flow of how an IPO works in India:
Step 1: Company decides to go public
The company and its board decide they want to raise funds from the public market.
Step 2: Appoint a Merchant Banker
The company hires a SEBI-registered merchant banker (also called a lead manager) to manage the entire IPO process — from paperwork to pricing to marketing.
Step 3: File DRHP with SEBI
A Draft Red Herring Prospectus (DRHP) is prepared — a detailed document containing everything about the company: its business, finances, risks, and how it plans to use the IPO funds. This is filed with SEBI for approval.
Step 4: SEBI Review and Approval
SEBI reviews the DRHP, may ask for changes, and then gives its observations. This process typically takes 30-75 days.
Step 5: IPO Opens for Subscription
Once approved, the IPO opens for the public to apply. It remains open for 3 to 5 days. Investors apply through UPI or ASBA during this window.
Step 6: Allotment
After the subscription closes, shares are allotted to applicants. If the IPO is oversubscribed, allotment is done through a lottery system for retail investors.
Step 7: Listing
The company's shares are listed on NSE or BSE. Trading begins and the listing price is determined by market demand and supply on that day.
You can track all currently open IPOs and upcoming IPOs on here.
Why Do Companies Do an IPO?
Companies go public for several reasons. Here are the most common ones:
1. Raise Capital for Growth
This is the primary reason. A company may need funds to build new factories, expand to new cities, hire more people, launch new products, or enter new markets. An IPO allows them to raise large amounts of capital without taking on debt.
2. Pay Off Existing Debt
Some companies use IPO proceeds to repay loans and reduce their debt burden. This cleans up their balance sheet and reduces interest costs going forward.
3. Allow Early Investors to Exit
When a startup receives funding from angel investors or venture capital firms, those investors eventually want to exit and get their returns. An IPO gives them a clean exit route by selling their shares to the public through an Offer for Sale (OFS) explained below.
4. Increase Brand Visibility and Credibility
A listed company gets significant media coverage and public attention around its IPO. This builds brand recognition and enhances the company's credibility with customers, partners, and future employees.
5. Attract and Retain Talent
Listed companies can offer Employee Stock Options (ESOPs) shares or rights to buy shares at a lower price. This is a powerful tool to attract top talent and keep them motivated as the company grows.
Types of IPO in India
Not all IPOs are the same. In India, there are two main types of IPO based on what is being offered:
1. Fresh Issue
In a fresh issue, the company creates and sells new shares to the public. The money raised goes directly into the company's bank account and is used for business purposes — expansion, debt repayment, working capital, etc.
Example: A company needs ₹500 crore to build a new manufacturing plant. It issues new shares worth ₹500 crore to the public. The entire ₹500 crore goes to the company.
Fresh issue = company gets the money = good for business growth.
2. Offer for Sale (OFS)
In an OFS, existing shareholders — promoters, early investors, or venture capital firms — sell their existing shares to the public. No new shares are created. The money raised goes to the selling shareholders, not to the company.
Example: A venture capital firm invested ₹50 crore in a startup 5 years ago. Now they want to exit. They sell their shares to the public through an OFS. The ₹200 crore raised goes to the VC firm, not to the company.
OFS = existing shareholders get the money = company does not directly benefit financially.
3. Combination of Both
Most large IPOs in India are a combination of fresh issue and OFS. The company raises some fresh capital for growth while existing investors also partially exit.
Fresh Issue vs OFS - Quick Comparison
| Fresh Issue | Offer for Sale (OFS) | |
|---|---|---|
| Who sells shares | Company (new shares) | Existing shareholders |
| Who gets the money | Company | Selling shareholders |
| Impact on company | More capital for growth | No direct financial benefit |
| Good for investors | Yes — funds used for growth | Depends on company quality |
Types of IPO Based on Pricing Method
IPOs in India also differ based on how the share price is determined:
Book Building Issue
The company announces a price band. For example ₹390 to ₹395. Investors bid within this range. The final price is decided based on demand after the subscription closes. Most IPOs in India today follow this method.
Fixed Price Issue
The company announces a fixed price upfront, say ₹150 per share. Investors apply at this exact price. There is no bidding involved. Fixed price issues are less common today and mostly seen in smaller SME IPOs.
Types of IPO Based on Company Size
Mainboard IPO
These are IPOs from larger, more established companies. They are listed on the main boards of NSE and BSE. Mainboard IPOs have stricter eligibility requirements set by SEBI and typically raise larger amounts of capital.
SME IPO
These are IPOs from Small and Medium Enterprises. They are listed on dedicated SME platforms — NSE Emerge and BSE SME. SME IPOs have lower capital requirements and relaxed compliance norms. They carry higher risk but also offer potentially higher returns.
You can view all current Mainboard IPOs and SME IPOs separately on IPO Rise.
Benefits of Investing in an IPO
1. Early Entry at Issue Price
IPOs give you a chance to invest in a company at its initial public price before the market drives the price up. If the company performs well, early investors can see significant gains over time.
2. Listing Gains
Many investors apply for IPOs specifically for listing day gains when a stock lists significantly above its issue price on day one. Strong IPOs in India have delivered listing gains of 30%, 50%, or even 100% in recent years.
3. Transparent Process
Every IPO in India must file a detailed prospectus with SEBI covering financials, risk factors, business model, and use of funds. This gives investors full information to make an informed decision unlike buying unlisted shares.
4. Regulated by SEBI
All IPOs in India are regulated by the Securities and Exchange Board of India (SEBI). This provides a structured, safe environment for public investors.
5. Easy to Apply
With UPI-based IPO applications, applying for an IPO today takes less than 5 minutes from your phone. Learn the full process in our guide on How to Apply for an IPO Using UPI and ASBA.
Key Takeaways
- An IPO is when a private company sells its shares to the public for the first time
- Companies go public to raise capital, repay debt, give early investors an exit, and build credibility
- There are two main types of IPO: Fresh Issue (company gets money) and OFS (existing shareholders get money)
- Book building is the most common pricing method — investors bid within a price band
- IPOs can deliver strong listing gains but also carry the risk of listing below issue price
- Always check GMP, subscription data, and company fundamentals before applying
Frequently Asked Questions
Q. What is the full form of IPO?
IPO stands for Initial Public Offering. It is the process by which a private company sells its shares to the general public for the first time through the stock market.
Q. What is the difference between Fresh Issue and OFS in an IPO?
In a Fresh Issue, the company creates new shares and the money raised goes to the company for business use. In an OFS (Offer for Sale), existing shareholders sell their shares and the money goes to them, not to the company.
Q. What is the difference between Mainboard and SME IPO?
Mainboard IPOs are from larger companies listed on the main boards of NSE and BSE with stricter eligibility norms. SME IPOs are from smaller companies listed on NSE Emerge or BSE SME platforms with lower capital requirements. SME IPOs carry higher risk but potentially higher returns.
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