Every year, dozens of Indian companies list on the stock exchange for the first time — some become multi-bagger wealth creators; many become long-term destroyers of capital. The difference is almost never in the hype surrounding the IPO. It is always in the fundamentals of the business.

Here is what an IPO actually is, how the process works in India, and the specific framework to evaluate an IPO before you apply.

What is an IPO?

An IPO (Initial Public Offering) is the process by which a privately held company first sells its shares to the general public through a stock exchange listing. After the IPO, shares can be freely traded on NSE or BSE by any investor. The company goes from being privately owned — by founders, employees, and private investors (VCs, PE funds) — to being publicly owned, with any member of the public able to buy a stake. For companies, an IPO raises growth capital. For early investors and founders, it provides a liquidity event to cash out some or all of their holding.

How an IPO Works in India: Step by Step

Step 1: DRHP Filing

The company files a Draft Red Herring Prospectus (DRHP) with SEBI — the market regulator. The DRHP is the most important document an IPO generates. It contains audited financials for 3 years, the objects of the issue (why the money is being raised), the risk factors, promoter background, and shareholding structure. SEBI reviews the DRHP and may raise observations or require disclosures before approving the IPO.

Step 2: Price Band Setting

The company and its investment bankers set a price band — a range of prices at which shares will be sold (e.g., ₹450–₹480 per share). Institutional investors (QIBs — Qualified Institutional Buyers) provide demand signals in a book-building process. The issue price is set at or near the top of the band if demand is strong.

Step 3: Subscription Window

The IPO is open for public subscription for 3–5 business days. Applications come from three categories:

  • QIB (Qualified Institutional Buyers): Mutual funds, insurance companies, FIIs — allocated 75% of the issue
  • Non-Institutional Investors (NII/HNI): High-net-worth individuals — allocated 15%
  • Retail Individual Investors (RII): Individual investors applying up to ₹2 lakh — allocated 10%

If the retail category is oversubscribed (more applications than available shares), allotment is done by lottery. If undersubscribed, all retail applicants get shares.

Step 4: Allotment and Listing

Shares are allotted approximately 6 days after subscription closes. Listing happens on NSE/BSE — the first day of trading for the stock. A listing above the issue price is called a listing gain; below is called a listing loss.

According to SEBI data, India saw over 75 mainboard IPOs in FY2025 raising approximately ₹1.6 lakh crore — the highest ever in a single year.

Fresh Issue vs OFS: The Most Important IPO Signal

Every IPO is split between:

Fresh Issue: New shares created by the company — proceeds go to the company OFS (Offer for Sale): Existing shareholders selling their shares — proceeds go to them, not the company

Fresh Issue OFS
Proceeds go to Company (growth capital) Existing shareholders
Signal Company needs capital to grow Insiders are cashing out
Generally better for Long-term investors Short-term listing gain

A company raising ₹5,000 crore with ₹4,500 crore as OFS is primarily giving early investors a liquidity exit. The company gets only ₹500 crore. This is not automatically bad — private equity backing requires eventual liquidity — but it means you must scrutinise what justifies the valuation if there is no growth capital coming into the business.

Always check the fresh issue vs OFS split before evaluating an IPO.

What to Read in the DRHP

The DRHP is public and available on SEBI's website. These are the sections that matter most:

1. Objects of the Issue

Why is the company raising money?

  • Good: Capacity expansion, new products, R&D, acquisition, debt reduction
  • Concerning: General corporate purposes (vague), funding past losses, working capital for a money-losing business
  • Red flag: Primarily OFS — no growth capital coming to the company

2. Financials (3-Year P&L and Balance Sheet)

Track these over 3 years:

  • Revenue growth: is the business actually growing?
  • EBITDA margin: is it expanding, stable, or contracting?
  • PAT: profitable or loss-making? Loss-making companies can be IPO candidates (Zomato, Paytm listed while making losses) — but profitability timeline and path matters
  • Debt: high debt IPOs use proceeds to pay down debt (often at stretched valuations)

3. Valuation vs Listed Peers

The DRHP will list competitor companies in the "Peer Comparison" section. Compare:

  • PE ratio at issue price vs listed peers
  • EV/EBITDA at issue price vs listed peers
  • P/B at issue price vs listed peers (especially relevant for banks and NBFCs)

An IPO at 45x PE where listed peers trade at 25x PE is asking you to pay a 80% premium for the privilege of being the first public buyer. Sometimes justified (higher growth trajectory); often not.

4. Risk Factors

Every DRHP has a lengthy risk factors section. Skip the generic regulatory risks and focus on:

  • Customer concentration: does one or two clients represent 30%+ of revenue?
  • Related party transactions: is the promoter doing business with the company at off-market terms?
  • Legal proceedings: significant ongoing litigation, SEBI investigations, tax disputes
  • Business model dependencies: licensing agreements, key personnel, single-geography exposure

5. Promoter and Shareholder Credentials

Who is selling in the OFS? If the promoter is selling significant stake, they are reducing skin in the game. If PE funds are selling, they held for 5–7 years and have earned their exit — that is normal. Track the promoter's post-IPO shareholding. Below 50% means diluted control; above 75% means they retain strong control.

Valuation Framework for Indian IPOs

For Profitable Companies

PE comparison: Issue PE vs sector peer PE. If issue PE is 30% above peers without clear justification (faster growth, better margins), it is rich.

EV/EBITDA comparison: More stable than PE — use for capital-intensive or loss-generating companies where profit is distorted by depreciation.

For Loss-Making Companies

Price/Sales (P/S): Revenue multiple — useful for high-growth startups where profitability is deferred. Compare to global peers in the same category.

Path to profitability: Is there a clear, time-bound plan to reach EBITDA breakeven? Or is the narrative "we'll figure out monetisation later"?

Growth Premium Justification

A company growing revenue at 40%+ can legitimately trade at a higher multiple than a listed peer growing at 15%. But the premium should be proportional. A company growing 40% and IPO-ing at 3x the peer multiple is asking for compounding of both the revenue growth and the multiple expansion — a very high bar.

Common IPO Traps in India

Trap 1: Grey Market Premium (GMP) as a Research Substitute

GMP reflects short-term listing demand, not business quality. Nykaa's GMP was 90%+ before listing; the stock underperformed for 2 years post-listing. Always evaluate the business before the GMP.

Trap 2: Oversubscription as Validation

High subscription rates reflect demand from HNI investors making leveraged bets on listing gains — not long-term investment thesis. A 100x oversubscription in the NII category is a bet on listing day flip, not a signal that the business is good.

Trap 3: Anchor Investor Halo

Anchor investors (large institutions given pre-IPO allocations) must hold for only 30 days. Their participation is not a long-term endorsement.

Trap 4: Ignoring Post-IPO Lockup Expiry

Promoters are locked in for 18 months; PE investors for 6 months. After lockup expiry, significant selling can depress the stock even if quarterly results are in line.

After the IPO: The Earnings Track Record Begins

An IPO is the company's first step in public markets. The quarterly earnings reports that follow are where the real track record is built.

For recently listed companies, the first 4–6 quarters of earnings calls are disproportionately important — they establish whether the management can meet guidance, whether the business model scales as promised in the DRHP, and whether management is transparent about setbacks.

StockMirror's earnings analysis for recently listed companies provides this signal from the moment their first earnings call is available — extracting Management Confidence, Earnings Quality, Revenue Growth driver analysis, and the Q&A tone from every transcript. For companies where the IPO narrative is still being tested against reality, this forward-looking signal is more valuable than any financial ratio.

→ Track earnings quality for recently listed companies on the screener · Market Calendar for upcoming IPO-related events

Key Takeaways

  • An IPO is a private company's first sale of shares to the public — company raises fresh capital, early investors get liquidity
  • The DRHP (Draft Red Herring Prospectus) is the most important IPO document — always check the objects of issue, 3-year financials, peer valuation comparison, and risk factors
  • Fresh issue vs OFS split is the first signal: OFS-heavy IPOs primarily benefit existing shareholders, not incoming investors
  • Grey market premium and oversubscription reflect listing-day speculation, not business quality — do not use them as investment research
  • Valuation at issue price vs listed peers is the most critical quantitative check: paying 80% premium over peers requires exceptional growth justification
  • According to SEBI data, India saw 75+ mainboard IPOs in FY2025 raising ₹1.6 lakh crore — the highest ever — making IPO literacy a critical skill for Indian investors

Frequently Asked Questions

What is an IPO?

An IPO (Initial Public Offering) is the first time a private company sells shares to the general public through a stock exchange. The company lists on NSE or BSE, and its shares become freely tradeable. Companies use IPOs to raise growth capital; early investors (founders, VCs, PE funds) use the OFS component to sell their stake and get liquidity. Post-IPO, the company files quarterly results and holds earnings calls like any other listed company.

How does an IPO work in India?

A company files a DRHP with SEBI for review, sets a price band with investment bankers, opens subscriptions for 3–5 days (QIBs get 75%, HNIs 15%, retail 10% allocation), allocates shares by lottery if oversubscribed in retail, and lists on NSE/BSE approximately 6 days after subscription close. Retail investors can apply via their broker, UPI app, or net banking using the ASBA process (blocked application — money is debited only if allotted).

Is IPO investment safe in India?

No investment is guaranteed, and IPOs carry specific risks: no public price history, valuation set by the issuer (potentially stretched), and insider selling via OFS. Some IPOs — TCS (2004), HDFC AMC (2018), Avenue Supermarts/D-Mart (2017) — have been exceptional long-term wealth creators. Others — Paytm (listed at 27% discount, then fell 80%) — destroyed significant capital. Always evaluate the business quality and valuation, not hype or GMP.

How do I evaluate an IPO before applying?

Read the DRHP: (1) Check fresh issue vs OFS — fresh issue is better. (2) Check 3-year revenue and profit trend. (3) Compare IPO PE/EV-EBITDA to listed peers — premium requires growth justification. (4) Read risk factors for customer concentration, related party transactions, and legal issues. (5) Check promoter post-IPO shareholding. Ignore grey market premium as a research tool — it reflects listing day demand, not business quality.

What is the difference between OFS and fresh issue in an IPO?

Fresh issue creates new shares — money goes to the company for expansion, debt repayment, or working capital. OFS (Offer for Sale) sells existing shares held by founders, VCs, or PE funds — money goes to them, not the company. An OFS-heavy IPO means the company isn't raising capital for itself; early investors are exiting. This is not automatically a red flag (PE exits are normal), but it means you must evaluate at whose expense the exit is happening.

Related: What is a Good PE Ratio? · What is EBITDA? · Market Cap Explained

Disclaimer: This article is for educational purposes only and does not constitute investment advice. Always do your own research before making investment decisions.