Initial Public Offer
Also written IPO · Initial Public Offer (IPO) · Initial public offering
The first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
In plain language
Until its IPO, a company's shares sit with a small group: promoters, perhaps a few private investors. The Initial Public Offer is the first time the company invites anyone eligible to buy them.
Chapter 3 puts it plainly: when a company makes an IPO, its shares become widely held and the shareholding pattern changes — shares once held by promoters are now held by retail investors and institutions. After the offer, the shares are listed and traded on a stock exchange, which is what gives the new shareholders a way out.
How it works
Two ways to offer shares (section 3.8.1). A fresh issue creates new shares; the money goes to the company and share capital rises. An offer for sale has existing shareholders sell part of their holding; the money goes to them and share capital does not change. An IPO can combine both.
Eligibility (section 3.7.1). Net tangible assets of at least Rs 3 crore in each of the preceding three full years (not more than 50 per cent in monetary assets, unless the excess is committed to the business, and no such limit if the IPO is entirely an offer for sale); average operating profit of at least Rs 15 crore over the preceding three years, with operating profit in each; net worth of at least Rs 1 crore in each of the three years. An issuer that does not qualify may still come to market through book building, if it allots at least 75 per cent of the net offer to QIBs and refunds everything if it cannot.
Promoters stay in. Promoters' contribution of at least 20 per cent of post-issue capital, locked in for 18 months (3 years where most proceeds fund capital expenditure). Holdings above that are locked in for 6 months (1 year in the capex case).
The numbers of the offer itself.
| Rule | Workbook figure |
|---|---|
| Issue open | Minimum 3, maximum 10 working days |
| Price band announced | At least 2 working days before opening |
| Minimum application (book built) | Rs 10,000 to Rs 15,000 |
| Allocation where issuer meets eligibility norms | Retail ≥ 35%, non-institutional ≥ 15%, QIB ≤ 50% (5% of it for mutual funds) |
| Minimum subscription | 90% of the net offer, else full refund within 4 days of closure |
| Payment | ASBA only; individuals applying up to Rs 5 lakh use UPI |
| Retail discount (if any) | Not more than 10% of the price to other categories |
IPO grading by a SEBI-registered rating agency is optional, on a scale of 1 (poor) to 5 (strong fundamentals), and is not a comment on the price.
A worked example
The workbook's own illustration. A company has 1,000 shares of Rs 10, held equally by promoters X and Y.
| A: fresh issue of 500 shares | B: each promoter sells 250 | |
|---|---|---|
| Shares in issue after | 1,500 | 1,000 |
| X's and Y's holding | 500 each = 33.33% each | 250 each = 25% each |
| Public holding | 500 = 33.33% | 500 = 50% |
| Who gets the money | The company | X and Y |
An allocation, illustrative. A book-built IPO with a net offer of Rs 1,000 crore from an issuer meeting the eligibility norms, price band Rs 120–144:
Retail individual investors at least Rs 350 crore
Non-institutional investors at least Rs 150 crore
of which 1/3 (Rs 50 crore) for applications above Rs 2 lakh up to Rs 10 lakh
and 2/3 (Rs 100 crore) for applications above Rs 10 lakh
QIBs not more than Rs 500 crore
of which 5% (Rs 25 crore) reserved for mutual funds
Minimum subscription (90%) Rs 900 crore
A bid lot of 100 shares is Rs 12,000 at the bottom of the band and Rs 14,400 at the top — inside the Rs 10,000–15,000 range at both ends.
Why NISM asks about it
Chapter 3 (Primary Markets) covers the IPO across sections 3.7 to 3.13: eligibility, promoters' contribution, minimum offer to public, subscription period, underwriting, grading, fresh issue versus offer for sale, pricing, allocation, ASBA and listing. Its sample questions ask who a retail investor is (not more than Rs 2 lakh) and where the money goes in an offer for sale.
Common exam traps
- In an offer for sale the company receives nothing. The proceeds go to the selling shareholders and share capital is unchanged.
- A retail individual investor invests not more than Rs 2 lakh in a single issue; above that is a non-institutional investor.
- 90 per cent minimum subscription for an equity public issue — the 75 per cent figure belongs to public issues of debt securities.
- The 75 per cent QIB allocation applies to issuers that do not meet the profitability track record; issuers that do meet it allocate not more than 50 per cent to QIBs.
- Grading is optional and is not a recommendation — it assesses fundamentals, not the issue price.
- The workbook defines the oversubscription ratio two ways. Section 3.12.1 calls it "the ratio of number of shares on offer to number of shares applied for", then divides each application by 1.52 for an issue subscribed 1.52 times — which is applied ÷ offered. Follow the worked table: allotment = shares applied ÷ times subscribed.
Where this is taught
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series IX · Chapter 4: Issue Management – Important Termsintroduced here
- Series II-A · Chapter 7: Public Offer of Securitiesintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
Related terms
- Offer for SaleAn offer of securities by existing shareholders — promoters, institutions, the government — to the public through an offer document. The sellers get the money; the company issues no new shares.
- ASBAThe mandatory payment mechanism for public and rights issues, in which your bank blocks the application money in your own account and debits it only if you actually get an allotment.
- Cut-off priceIn a book-built issue, the price at which the issue is fully subscribed. Everyone who bid at or above it succeeds and is allotted at that price.
- Further Public OfferA fresh public offer of securities by a company that has already made an IPO — used to raise more capital or, as an offer for sale, to widen public shareholding.
- Green Shoe OptionAn option in a public issue to allot up to 15 per cent extra shares, parking the money to buy shares in the market for 30 days after listing if the price falls below the issue price.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Book built issueA public issue in which the price is discovered from investor bids inside a price band, rather than fixed by the issuer in advance, with allotment made at the cut-off price.
- Offer documentThe document inviting subscription to an issue — a red herring prospectus, prospectus, shelf prospectus or information memorandum in a public issue, and a letter of offer in a rights issue.
- Hard underwritingAn underwriter's commitment to buy an IPO's unsold shares, given at the initial filing stage before the issue price is even fixed — the firmer and earlier of the primary market's two underwriting commitments.
- Residual put optionA put option that promoters agree to only as a fallback: the AIF cannot exercise it unless the company fails to list within an agreed time or the AIF cannot use the other exit routes.
- Pre-IPO StrategyAn AIF mandate to subscribe to a company's shares before its IPO at a discount to the issue price, accepting the ICDR lock-in that runs from the date of listing.
- Corporate liquidation exitThe least preferred, worst-case way for an AIF to exit a portfolio company: a long statutory process that returns only salvage value, if any, unless preference rights or debt give priority.
- ProspectusThe offer document a company issues when it raises money from the public. It sets out the company, its promoters, finances, risks, purpose of the issue and terms, so investors can decide.
- Securities marketThe market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Qualified Institutions PlacementA fast route by which an already-listed company places eligible securities privately with Qualified Institutional Buyers, without the prospectus and timetable of a public issue.
- Private placementAn issue of securities to a select group of identified investors — institutions, banks, mutual funds — rather than to the public, with fewer formalities and no advertising.
- Self Certified Syndicate BankA banker to an issue, registered with SEBI, that offers ASBA — blocking an applicant's application money in their own bank account until allotment, then debiting or releasing it.
- Fixed price issueA public issue in which the company, with its lead manager, sets the issue price in advance and discloses it, so investors know exactly what they will pay when they apply — the alternative to a book built issue.
- UnderwriterAn institution that agrees, under an underwriting agreement, to subscribe to the part of a public issue that investors do not take up — and is paid a commission for standing behind the issue.