How IPOs Work in India: Step-by-Step Mechanics from DRHP to Listing

Why companies decide to go public

A private company can survive for decades without ever listing on a stock exchange. Listing is therefore a deliberate strategic choice driven by a combination of motivations rather than any single one. Understanding these motivations is the first lens through which any IPO should be examined.

• Capital raising for growth:A fresh issue brings cash onto the balance sheet that can fund factory expansion, new product lines, geographic entry, working capital, or repayment of debt. The DRHP's "Objects of the Issue" section spells out exactly how the proceeds are intended to be used and is arguably the most important section of the document.
• Liquidity for early backers: Venture capital funds, private equity firms and angel investors typically commit capital with a 7-10 year horizon. A listing creates a liquid secondary market through which they can exit, partly via an Offer for Sale (OFS) component on listing and partly through subsequent block deals once their lock-in period ends.
• Brand visibility and credibility: A listed company submits to quarterly disclosures, audited financials, governance norms and continuous public scrutiny. For B2B firms, customers, banks and rating agencies often view this as a credibility signal.
• Currency for acquisitions and ESOPs: A listed stock can be used as acquisition currency in share-swap deals and allows employees holding ESOPs to realise their grants in a real market.
• Promoter wealth realisation: Founders and promoters who have spent years building the company can monetise a portion of their holding while still retaining majority control.

Importantly, the timing of the IPO usually reflects management's read of market conditions. Bull markets have historically seen far more IPO activity than bear markets, because issuers can achieve stronger valuations and broader subscription when retail and institutional risk appetite is elevated.

Pre-IPO preparation: bankers, due diligence, valuation

The road to a listing typically begins 12-18 months before the actual issue date. The first major step is appointing the merchant bankers, also called the Book Running Lead Managers (BRLMs).

Banker selection: Companies issue a beauty parade to multiple investment banks — domestic firms such as Kotak, Axis Capital, ICICI Securities, JM Financial, IIFL Capital and SBI Capital, alongside global firms such as Morgan Stanley, Citi, JP Morgan, Goldman Sachs, Bank of America and Jefferies. The mandate is awarded based on fee, sector expertise, distribution reach and past league-table credentials. Most large IPOs use 4-8 BRLMs to spread placement risk and broaden investor coverage.

Due diligence: The bankers, alongside legal counsel, auditors, industry consultants and the registrar, conduct extensive due diligence. They review financial statements, contracts, related-party transactions, litigations, regulatory approvals, intellectual property and corporate governance. This process takes several months and culminates in the drafting of the DRHP.

Valuation by lead managers: The bankers prepare a valuation range using multiple approaches — comparable company multiples (P/E, EV/EBITDA, EV/Sales), discounted cash flow models, and precedent transactions. The valuation range is tested via informal conversations with anchor investors and large mutual funds, who provide indicative interest at various price levels. The final price band is set just before issue opening based on this combined market feedback.

DRHP: the Draft Red Herring Prospectus

The DRHP is the first major regulatory document filed with SEBI. The word "draft" signals that it is not yet a final offering document — it lacks the price band and the final issue size, and SEBI may require modifications before granting clearance.

The DRHP is freely available on SEBI's website, on the lead managers' websites, and on the company's investor relations page. The full document often runs 500-1000 pages. Key sections that warrant detailed reading include:

• Risk Factors:A blunt enumeration of everything that could go wrong with the business, the industry, the regulatory environment, and the company's specific operations. Treat this as the single most important section.
• Industry Overview:A consultant-prepared overview of the addressable market, growth drivers, competitive landscape and trends. Often commissioned from CRISIL, Frost & Sullivan, RedSeer or similar.
• Business Overview:The company's product portfolio, geographies, customers, distribution model, and competitive positioning.
• Objects of the Issue: Exactly how fresh issue proceeds will be deployed — debt repayment, capex, working capital, general corporate purposes, etc.
• Financial Information: Three years of restated consolidated financial statements plus the most recent stub period. Read the cash flow statement carefully — many IPO candidates show strong reported profits but weaker operating cash flows.
• Capital Structure: Promoter holding, pledge details, ESOPs outstanding, and the dilution effect of the IPO.
• Management and Promoters: Background, experience, past ventures, related-party transactions, criminal proceedings (if any).

SEBI typically issues observations on the DRHP within 30-75 days. The company addresses these observations and refiles, eventually receiving final clearance to proceed to the next stage.

RHP and the Final Prospectus

RHP (Red Herring Prospectus): Once SEBI clearance is in hand, the company files the RHP with the Registrar of Companies. The RHP is the near-final offering document and includes the price band but still lacks the final issue price (which depends on book building). The RHP is the document investors actually rely on while bidding.

Final Prospectus: After bidding closes and the issue price is determined, the company files the final prospectus with the ROC. This is the binding legal document for the issue. Investors who applied at cut-off are deemed to have applied at the final issue price.

Price band and the book building method

Indian IPOs almost universally use the book building method. The company, in consultation with the BRLMs, announces a price band — a floor and a cap — within which investors can bid. For example, a price band of ₹450-₹475.

During the bidding window, a real-time order book is constructed showing demand at each price point in the band. Retail investors can either bid at a specific price or use the "cut-off" option, which means they accept whatever final issue price emerges. Most retail bids are at cut-off, because in oversubscribed issues only cut-off bids and bids at or above the discovered price are eligible for allotment.

The final cut-off price is determined by the demand curve — most oversubscribed issues are priced at the upper end of the band. Pricing slightly below the cap, when demand justifies it, is sometimes done to reward retail subscribers and create a listing-day buffer.

Fixed price method (now rare)

In a fixed price IPO, the company simply declares a single issue price and all investors bid at that price. There is no book building, no price discovery, and no flexibility. Fixed price IPOs are now extremely rare on the mainboard — they survive mainly in the SME segment where issue sizes are too small to justify a full book-building exercise. The reason for the decline is that book building generally produces better price discovery and better matches supply with demand.

The 3-day subscription window

The IPO opens for subscription on a Monday, Tuesday or Wednesday (so that the issue is open across at least three working days excluding holidays). The exchange and registrar publish live subscription numbers throughout each trading day, broken down by category — Retail, NII, QIB, Employee.

Bid revision is allowed during the window — investors can modify quantity, price or even withdraw their bid (only retail and employee categories can withdraw, QIBs cannot withdraw bids in most cases). Anchor allocation, however, happens one working day before the issue opens and is not revisable.

Allotment categories: Retail, NII, QIB and the anchor portion

SEBI mandates a fixed allocation across investor categories for book-built mainboard IPOs:

• QIB (Qualified Institutional Buyers) — 50%: Mutual funds, FPIs, insurance companies, pension funds, banks and similar institutions. Up to 60% of the QIB portion can be allocated to anchor investors one day before the IPO opens.
• NII / HNI (Non-Institutional Investors) — 15%: Individuals and entities applying for more than ₹2 lakh. Since April 2022 SEBI norms, this is split into small HNI (₹2-10 lakh, lottery-based allotment) and big HNI (above ₹10 lakh, proportionate allotment).
• RII (Retail Individual Investors) — 35%: Individuals applying up to ₹2 lakh. Lottery-based allotment if oversubscribed.
• Employee reservation — up to 5%: Optional; companies often offer their employees the same allocation at a discount of up to 10% from the issue price.

The bidding process on BSE and NSE

Both BSE and NSE host the IPO order book. Brokers and ASBA self-certified syndicate banks (SCSBs) submit bids on behalf of their clients to either exchange. Bids are aggregated in real time across both exchanges into a single consolidated order book.

Retail bids flow primarily through the UPI mandate route — the retail investor selects lots and price (or cut-off) on a broker app, enters their UPI VPA, and approves the mandate request on their UPI app, which blocks the bid amount in their bank account without debiting it. Institutional bids flow through ASBA via the custodian banks.

Mainboard vs SME IPO

India has two listing segments. The mainboard covers large companies on NSE and BSE's main platforms — the familiar territory where listings such as Reliance, TCS, Infosys and HDFC Bank trade. The SME platform (BSE SME and NSE Emerge) is dedicated to small and medium enterprises with relaxed eligibility norms.

Key structural differences include eligibility (mainboard requires a 3-year track record of profitability or alternative qualification routes, SME platforms allow newer companies), minimum issue size, retail lot size, allocation split, and mandatory market making for SME issues for at least three years post-listing. A dedicated guide on the SME segment is available at SME IPO in India.

Lock-in periods: promoter and anchor

Lock-ins are designed to align the interest of insiders with the long-term performance of the stock and prevent immediate post-listing selling pressure.

• Promoter lock-in: Under SEBI ICDR Regulations, the minimum promoter contribution (typically 20% of post-issue capital) is locked in for 18 months from the date of allotment (revised from 3 years in 2021). Any promoter holding above this minimum threshold is locked in for 6 months.
• Anchor investor lock-in: Effective from April 2022, half the anchor allocation is locked in for 30 days and the remaining half for 90 days. Earlier, the entire anchor allocation was locked in for only 30 days. The phased lock-in was introduced to reduce listing-day selling pressure.
• Pre-IPO investor lock-in: Investors who received shares in the year preceding the IPO are typically locked in for 6 months from the date of listing.
• Employee lock-in: Generally 6 months for allotments under employee reservation, though specific terms depend on each prospectus.

Listing day mechanics

Listing day is when the stock formally begins trading on NSE and BSE. Under the SEBI T+3 listing timeline, listing now happens three working days after issue closure — significantly faster than the earlier T+6 cycle.

The trading day begins with a special pre-open session for new listings (9:00-9:45 AM), where orders are collected and the listing price is discovered using an equilibrium price mechanism. Continuous trading then begins. On listing day, normal price bands do not apply — the stock can move freely. From the second day onwards, dynamic circuit limits (typically 5%, 10% or 20% based on category) take effect.

Settlement of trades on listing day follows the standard T+1 cycle for cash-segment equities. Shares allotted in the IPO are already in the demat account by listing day.

Pre-listing trading: the grey market

Before official listing, an unregulated grey market trades both IPO application forms (kostak rate) and post-allotment shares (subject-to rate, plus a Grey Market Premium). These markets are unofficial, opaque and unenforceable. A dedicated educational guide is available at Grey Market Premium (GMP) in IPOs.

Post-listing trading curbs

After listing day, the stock is subjected to standard exchange surveillance. New listings frequently land in surveillance measures such as ASM (Additional Surveillance Measure) Stage I or II if their volatility, volume, or price action triggers the predefined thresholds. ASM stages can include 100% upfront margin requirements, weekly settlement (trade-to-trade segment), or daily price bands as low as 5%.

Some IPOs also enter the GSM (Graded Surveillance Measure) framework if specific governance or financial concerns are flagged. These surveillance frameworks are applied automatically based on quantitative rules and are designed to protect retail investors from extreme volatility in newly listed stocks.

Common terminology you will encounter

• Greenshoe option: An over-allotment option allowing the lead manager to allot up to 15% extra shares for price stabilisation in the first 30 days post-listing.
• OFS vs Fresh Issue: Fresh Issue creates new shares (proceeds to company); OFS sells existing shares (proceeds to selling shareholders).
• Anchor portion: Up to 60% of the QIB segment allocated to anchor investors one day before issue opens.
• IPO grading: Earlier mandatory rating of IPOs on a 1-5 scale by credit rating agencies. Made voluntary in 2013 and effectively phased out due to weak correlation with actual performance.
• Subscription multiple:The number of times an issue is oversubscribed in each category, e.g. "QIB subscribed 25.4x, NII 11.2x, Retail 4.6x."
• Cut-off price: The final issue price discovered through book building.
• Basis of allotment: The published document showing how shares were distributed across categories and applicants in an oversubscribed issue.

A practical reading list for any IPO

Before forming any view on an IPO, the following educational checklist — drawn from widely published investor education materials — outlines what students of the market commonly review:

1. Read the Risk Factors and Objects of the Issue sections of the RHP in full.
2. Compare the implied valuation multiples with listed peers in the same sector.
3. Examine the OFS-to-fresh-issue ratio. A predominantly OFS issue means the company itself is not raising new capital.
4. Check anchor investor quality. Reputed mutual funds and large FPIs anchoring an issue is historically viewed as a positive institutional signal.
5. Read the operating cash flow trend over the past three years — not just reported profit. Working capital intensity and receivable trends matter.
6. Understand promoter background, related-party transactions and any pledged holdings.

Build the foundation first

Before applying to any IPO, ensure your fundamentals are in place. Review our companion guide on how IPOs work in India (overview) for a more general primer, and the dedicated articles on IPO allotment, grey market premium, and SME IPOs.