BharatNotes What is Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the first sale of a company's shares to the general public, after which the company is "listed" and its shares trade on stock exchanges such as the NSE and BSE. It takes place in the primary market and is governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations"). An IPO can comprise a fresh issue (new shares, with money going to the company) and/or an offer for sale, OFS (existing shareholders, including the government, selling their holdings).
Why companies (and the government) use IPOs
- Raising capital: funds expansion, debt reduction and working capital without repayment obligation (unlike loans).
- Disinvestment: the government monetises stakes in public-sector firms — e.g., the LIC IPO (May 2022) was a pure OFS raising ₹20,557 crore, India's largest until then.
- Liquidity & exit: early investors and promoters can partly exit; listing also raises a company's profile and credibility.
- Currency for growth: listed shares can later be used for acquisitions and employee stock options.
Pricing methods and key features
| Feature | Fixed-Price Issue | Book-Building Issue |
|---|---|---|
| Price | Stated upfront in prospectus | Discovered via a price band (cap ≤ 20% above floor) |
| Document | Prospectus | Draft Red Herring Prospectus (DRHP) filed with SEBI |
| Demand visibility | Known only after close | Visible during bidding |
| Common use | Smaller issues | Most large modern IPOs |
In a book-built issue by a profitable company, the net offer is broadly split: up to 50% to Qualified Institutional Buyers (QIBs), at least 35% to retail individual investors, and 15% to non-institutional investors (HNIs). Up to 60% of the QIB portion may go to anchor investors, who commit ahead of the public opening. Companies not meeting the profitability test (ICDR Reg. 6(2)) may still list via the book-building route if they allot at least 75% to QIBs.
Eligibility and safeguards (SEBI ICDR, 2018)
- Promoter contribution: at least 20% of post-issue capital, locked in (the minimum-contribution lock-in was reduced from three years to 18 months for issues opening on/after 1 April 2022).
- Minimum public shareholding: generally 25% (relaxations for very large issuers).
- Disclosure: the DRHP must detail financials, risk factors and use of proceeds.
Current status (as of June 2026)
India's record IPO is Hyundai Motor India (October 2024), which raised about ₹27,856 crore (~$3.3 billion) — a pure OFS by its Korean parent — overtaking LIC's ₹20,557 crore (May 2022). SEBI has also proposed (Aug 2025 consultation) a flexible allocation for very large IPOs (above ₹5,000 crore), potentially lowering the retail quota toward 25% and raising the QIB share.
UPSC angle
For Prelims, focus on definitions and actors: DRHP, price band, QIB/RII/NII/anchor investor, fresh issue vs OFS, fixed-price vs book-building, and SEBI's regulatory role. For Mains GS3, link IPOs to capital-market deepening, disinvestment policy, and mobilising household savings into equity. This is a foundational concept underpinning the wider topic family of capital markets and financial-sector reforms.
