How IPOs Work in India: Process, Allotment, Listing & Grey Market Premium

Why do companies go public?

A company decides to go public for several reasons, and understanding these motivations helps you evaluate any IPO more critically:

• Raising capital for growth: The most common stated reason. A company needs funds to expand operations, build new factories, enter new markets, or repay debt — and the public equity market is one of the largest and most efficient sources of capital.
• Providing an exit to early investors: Venture capital firms, private equity funds, and angel investors who funded the company in its early stages need a way to realise returns on their investment. An IPO creates a liquid market for those shares through an Offer for Sale (OFS) component.
• Brand visibility and credibility:Being listed on NSE or BSE lends credibility — it signals that the company met SEBI's regulatory standards and is willing to submit to quarterly disclosure requirements.
• Employee stock options (ESOPs): Employees who hold ESOPs can only realise their value when there is a public market for the shares.

It is important to note that the decision to go public also reflects the promoter's and existing shareholders' assessment of the right timing. Companies tend to go public when market conditions are favourable — bull markets historically see more IPO activity than bear markets.

SEBI's IPO regulations: the DRHP and RHP

Every IPO in India is regulated by SEBI (Securities and Exchange Board of India) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations. The process involves multiple stages of documentation and approval.

DRHP (Draft Red Herring Prospectus):The company files a DRHP with SEBI, which contains detailed information about the company's business, financials, risks, management, litigation, use of IPO proceeds, and everything an investor would need to evaluate the offering. SEBI reviews the DRHP and may request modifications. The word "draft" means this document is not final — it is subject to SEBI's observations.

RHP (Red Herring Prospectus): After SEBI clears the DRHP (usually within 30-75 days), the company files the RHP, which is the near-final prospectus. The RHP includes the price band for the IPO but still lacks the final issue price, which is determined after the book-building process.

Final prospectus: After the IPO bidding closes and the issue price is determined, the company files the final prospectus with the Registrar of Companies (ROC). This is the binding legal document.

Reading the DRHP — particularly the "Risk Factors" section and the "Objects of the Issue" section — is one of the most important steps an investor can take before applying for any IPO. These documents are freely available on the SEBI website and on the company's IPO page.

Price band and book building

In a book-building IPO, the company sets a price band — a range with a floor price and a cap price. For example, a company might set a price band of ₹340-₹360. Investors bid within this range.

Retail investors can bid at any price within the band or select the "cut-off" option, which means they are willing to pay whatever the final issue price turns out to be. Most retail investors apply at cut-off, because if the issue is oversubscribed (as most popular IPOs are), only cut-off bids and bids at or above the final issue price are considered.

The issue price is determined by the company and its merchant bankers based on the demand curve — the distribution of bids across the price band. In practice, most oversubscribed IPOs are priced at the upper end of the band (the cap price).

Lot size and minimum application

SEBI mandates that IPO shares be allotted in lots, not individual shares. The lot size is calculated so that the minimum application value for retail investors falls approximately between ₹10,000 and ₹15,000. This means the lot size varies by IPO.

Example: If the price band is ₹400-₹420 per share, the lot size might be set at 35 shares. At the upper end: 35 × ₹420 = ₹14,700. A retail investor must apply for a minimum of one lot. They can apply for up to a maximum value of ₹2,00,000 (as of current SEBI norms) under the retail category. Applications exceeding ₹2,00,000 fall into the HNI (High Net-worth Individual) category.

Investor categories

SEBI divides IPO applicants into distinct categories, each with a reserved portion of the total shares:

• QIB (Qualified Institutional Buyers): Mutual funds, insurance companies, foreign portfolio investors (FPIs), and other institutional investors. Typically allocated 50% of the issue in a book-building IPO.
• NII / HNI (Non-Institutional Investors): Individuals and entities that apply for more than ₹2,00,000. Typically allocated 15% of the issue. This category is further split into small HNI (₹2-10 lakh) and big HNI (above ₹10 lakh) since SEBI's 2022 regulations.
• RII (Retail Individual Investors): Individuals applying for up to ₹2,00,000. Typically allocated 35% of the issue. If oversubscribed, allotment is done by lottery — each retail applicant gets either one lot or nothing.
• Employee reservation (if applicable): Some companies reserve a portion (typically 5%) for their employees at a discount to the issue price.

How to apply: the ASBA and UPI process

The ASBA (Application Supported by Blocked Amount) process revolutionised IPO applications in India. Here is how it works, step by step:

1. Ensure prerequisites: You need an active demat account, a linked trading account, and a bank account with UPI enabled. Your PAN must be linked to your demat account.
2. Find the active IPO:Open your broker app (Zerodha, Upstox, Angel One, Groww, 5Paisa) or your bank's net banking portal. Active IPOs are listed in the IPO section.
3. Select lots and bid price:Choose the number of lots (minimum one) and either enter a specific price within the band or select "cut-off."
4. Enter your UPI ID: This is your VPA (Virtual Payment Address) — e.g., yourid@upi. The IPO application system will send a mandate request to your UPI app.
5. Approve the mandate:Open your UPI app (Google Pay, PhonePe, BHIM, or your bank's UPI app) and approve the mandate within the deadline (typically 24-48 hours). This authorises the bank to block (not debit) the application amount.
6. Wait for allotment: The blocking ensures your money stays in your account, earning interest, until the allotment day. If allotted, the amount is debited and shares are credited to your demat. If not, the block is released.

Critical tip: Failure to approve the UPI mandate within the deadline is the single most common reason for IPO application rejection. Set a reminder to approve the mandate immediately after submitting.

Allotment process and basis of allotment

The allotment process depends on the subscription ratio — how many times the issue is oversubscribed in each category.

Retail category (RII): If the retail portion is subscribed 1x or less, every applicant gets at least one lot. If it is oversubscribed (which is the norm for popular IPOs), allotment is done by computerised lottery. Each application has an equal probability of getting one lot, regardless of how many lots were applied for. This means applying for one lot or fifteen lots gives you the same chance of allotment in a heavily oversubscribed IPO.

HNI category: Under the revised 2022 SEBI norms, small HNIs (₹2-10 lakh) also get lottery-based allotment, similar to retail. Big HNIs (above ₹10 lakh) receive proportionate allotment — if the category is 10x oversubscribed, they get 1/10th of the shares they applied for.

The registrar (typically KFin Technologies or Link Intime) publishes the basis of allotment on their website. You can check your allotment status on the BSE website using your application number or PAN.

Listing day: what happens

The listing day is when the company's shares begin trading on NSE and BSE for the first time. The day typically unfolds in three phases:

Pre-open session (9:00-9:45 AM)

The exchange conducts a special pre-open session for new listings (45 minutes, longer than the usual 15-minute pre-open). During this session, orders are collected but not matched. At the end, the exchange determines the listing price using an equilibrium price discovery mechanism — the price at which the maximum number of shares can trade.

Continuous trading begins

From 10:00 AM (approximately), normal continuous trading begins. There are no circuit limits on listing day for the first session — the stock can move up or down without any price band restriction. This means listing day volatility can be extreme. Stocks have historically listed anywhere from 100% above the issue price to 40% below it.

Closing and beyond

After the first day, normal circuit limits apply (typically 20% for new listings). The T+1 settlement cycle applies to IPO shares like any other equity trade. Shares allotted in the IPO are already in your demat account by listing day, so you can sell them during the listing session if you choose.

Grey Market Premium (GMP): what it is and why it is unreliable

The "grey market" is an unofficial, unregulated market where IPO shares are traded before the listing date. The Grey Market Premium (GMP) is the premium (or discount) at which these unofficial trades occur, expressed in rupees per share.

For example, if an IPO has a price band of ₹300-₹320 and the GMP is ₹150, it implies that grey market participants expect the stock to list around ₹470 (₹320 + ₹150). GMP is widely followed by retail investors and discussed extensively on social media and IPO-focused websites.

However, GMP is deeply unreliable for several reasons:

• It is not regulated by SEBI or any exchange. Trades are informal, unenforceable, and opaque.
• The grey market is thin — a small number of participants can significantly move the GMP, creating artificial signals.
• GMP can be manipulated by parties with vested interests in inflating demand for the IPO.
• Historical data shows numerous cases where IPOs with high GMP listed flat or negative, and IPOs with low GMP delivered strong listings.

Relying on GMP as a basis for IPO application decisions ignores the fundamental reality that the grey market is neither transparent nor efficient.

Historical IPO performance: a mixed record

India's IPO market has delivered both spectacular successes and painful failures. Historical examples illustrate the range:

• LIC IPO (May 2022):India's largest-ever IPO raised approximately ₹21,000 crore. Despite massive retail enthusiasm, the stock listed at a discount of about 8% to the issue price and continued to decline in subsequent months. As recorded in financial reports from 2022, investors who held from listing saw significant losses in the months that followed.
• Paytm / One97 Communications (November 2021): One of the most anticipated tech IPOs in Indian history, priced at ₹2,150 per share. The stock listed at ₹1,950 — a 9.3% discount — and continued to decline over the following year, falling below ₹500 by late 2022. It became a widely cited case study for valuation concerns in tech IPOs.
• Zomato (July 2021): Listed at a 53% premium to its issue price of ₹76 on the first day. However, the stock subsequently fell below its issue price by 2022 before recovering in later years. The Zomato experience illustrated that even a strong listing does not guarantee sustained performance.
• IRCTC (October 2019):Listed at approximately 90% premium and continued to appreciate significantly over the following two years. It became one of the most cited "successful" IPOs of that era among retail investors.

Academic studies of Indian IPO performance have generally found that while listing-day returns are often positive (especially in bull markets), long-term returns over 1-3 years have historically been mixed, with many IPOs underperforming the broader index. This pattern is not unique to India — it has been documented globally.

SME IPOs: a different segment

Small and Medium Enterprise (SME) IPOs are listed on NSE Emerge or BSE SME platforms. They differ from mainboard IPOs in several important ways:

• Lower regulatory requirements: SME companies have relaxed SEBI compliance requirements compared to mainboard listings. This means less disclosure and less scrutiny.
• Lot sizes are larger: SME IPO lot sizes are designed for higher minimum investment (often ₹1-2 lakh per lot), which limits retail participation.
• Lower liquidity: SME stocks typically have much lower trading volumes than mainboard stocks, making it harder to exit positions at desired prices.
• Higher risk: SEBI has repeatedly cautioned retail investors about SME IPOs, noting instances of price manipulation and governance concerns. The SME segment has seen both extraordinary listing gains and complete value destruction.

The SME IPO space in India expanded rapidly in 2023 and 2024, with hundreds of companies listing. SEBI introduced tighter regulations for SME IPOs in 2024 to address governance concerns, including stricter profitability requirements and enhanced disclosure norms.

Rights issue, FPO, and OFS: related but different

An IPO is often confused with other mechanisms for companies to raise capital from the public. Here is how they differ:

• Rights issue: An already-listed company offers new shares to existingshareholders in proportion to their current holdings, usually at a discount to the market price. Shareholders can subscribe, renounce (sell the right), or let it lapse. Reliance Industries' 2020 rights issue (₹12,000+ crore) was one of the largest in Indian history.
• FPO (Follow-on Public Offer):An already-listed company issues new shares to the public (not just existing shareholders). FPOs are less common in India than IPOs. Yes Bank's 2020 FPO was a notable example.
• OFS (Offer for Sale): Existing shareholders (often promoters or institutional investors) sell their shares to the public through the exchange mechanism. No new shares are created — it is a change of ownership. OFS is commonly used by the government to divest stakes in public sector undertakings.

IPO evaluation framework for educational context

While this article does not provide any assessment of specific IPOs, the following framework — drawn from widely published investor education materials — outlines the factors that financial educators commonly discuss when teaching about IPO evaluation:

1. Read the DRHP:Focus on the "Risk Factors" section (what can go wrong), "Objects of the Issue" (what the company plans to do with the money), and the financial statements (revenue growth, profitability, debt levels).
2. Understand the valuation context: Compare the P/E ratio implied by the IPO price band with listed peers in the same sector. A P/E ratio significantly higher than comparable companies requires justification (faster growth, stronger moat, etc.).
3. Check the OFS vs fresh issue split: If the IPO is predominantly OFS (existing shareholders selling), the money does not go to the company for growth — it goes to the sellers. A high OFS component in a loss-making company has historically been viewed sceptically.
4. Look at the promoter and management track record: Corporate governance quality, past ventures, related-party transactions, and promoter pledge percentages are all documented in the DRHP.
5. Examine the anchor investor allocation: Mainboard IPOs allocate 60% of the QIB portion to anchor investors one day before the IPO opens. The quality of anchor investors (reputed mutual funds vs unknown entities) was historically viewed as a signal of institutional confidence.

Understanding what a stock is before investing

If you are considering participating in IPOs, ensure you have a solid understanding of what share ownership means, how stock prices are determined on exchanges, and how the demat and settlement systems work. An IPO is not a lottery ticket — it is a decision to become a part-owner of a business, with all the risks and responsibilities that entails.