IPO Guide 2025: How IPOs Work, GMP Explained, Allotment Tips, Risks, and FAQs

An Initial Public Offering (IPO) is when a private company sells shares to the public for the first time through the stock market. After the IPO, the company becomes public. Some investors aim for big gains on listing day. Others lose money when they skip research. This guide explains IPOs in clear steps. It covers how IPOs work, the risks and rewards, ways to boost your allotment chances, GMP, and SEBI’s new when-listed platform. Read this before you apply; it will help you decide.

The table below usually shows details like upcoming IPO GMP, IPO price, expected gain, dates, and type. This helps you make better decisions.

WHY COMPANIES DO AN IPO

Companies go public for clear reasons.

• Raise money for growth.
• Pay off loans.
• Buy other businesses or assets.
• Reward employees with stock options.
• Let early investors sell some shares.
• Build public trust and visibility.

HOW AN IPO WORKS, STEP BY STEP

Decision and advisers

The company decides to go public. It hires investment banks and underwriters to run the IPO process.

Draft documents

The company prepares a Draft Red Herring Prospectus, DRHP. The DRHP lists financials, business plans, risks, and use of funds.

SEBI review and approval

The company files the documents with SEBI. SEBI reviews and grants approval once details meet rules.

Price method and roadshows

The company selects a price method. The two main types are fixed price and book building. Executives hold roadshows to show the business to big investors.

Issue opens for investors

Retail and institutional investors apply. Applications use ASBA or UPI as per rules. Bids come in during the issue window.

Allotment and listing

After the issue closes, the company finalizes the price if book building applies. Shares get allotted. If demand is high, allotment may follow a lottery. The shares list on the exchange and trading begins.

TYPES OF IPO

Fixed Price Issue

The company sets one offer price. Investors buy at that price. Demand becomes clear only after the issue closes.

Book Building Issue

The company sets a price band, a floor and a cap. Investors bid inside that band. Final price sets after bids. This often matches market demand better.

KEY TERMS YOU SHOULD KNOW

• Issuer, the company that offers shares.
• Underwriter, the bank that helps sell shares.
• Price band, the range for bids in book building.
• DRHP, the draft prospectus.
• Oversubscription, more demand than shares available.
• Green shoe option, allowed extra allotment when demand exceeds supply.
• Flipping, selling shares quickly after listing for profit.

WHAT IS IPO IN SIMPLE WORDS?

An IPO is the first time a company sells part of itself to the public. You apply to buy shares. If you get allotment, the shares arrive in your Demat account. After listing day, you hold or sell the shares.

IS IT GOOD TO INVEST IN AN IPO?

The short answer is: sometimes. IPOs offer early entry into a company. Some list with big gains. Others list at a loss. Your choice should rest on company facts, not hype.

Look at these factors before you apply:

• Financial health and profit history.
• Business model and growth plan.
• Promoter reputation.
• Use of IPO funds.
• Industry position and peers.

HOW TO EARN FROM AN IPO

You earn mainly in two ways.

• Listing gain. If the IPO lists higher than the issue price, you get a quick profit when you sell.
• Long term growth. Hold shares for years while the company grows and the price rises.

WHO CAN INVEST IN AN IPO?

Most retail investors are eligible, provided you meet these rules.

• You have a PAN.
• You have a Demat account.
• You have a bank account linked for payment.
• You have ASBA or UPI setup for payment.
Non-resident Indians apply through NRE or NRO accounts under their rules.

WHO IS NOT ELIGIBLE FOR AN IPO?

• People without PAN.
• People without a Demat account.
• Investors banned by SEBI.
• Those who try multiple applications under one PAN.
• Some foreign investors without necessary approvals.

CAN I SELL IPO SHARES?

You sell shares only after the shares list on the exchange. You cannot sell before listing.

IS IPO MONEY REFUNDABLE?

If you do not get allotment, the money held for your application gets released back to your bank. The process happens automatically through the payment mechanism.

CAN I WITHDRAW MY IPO ANYTIME?

You may cancel or change your application only while the issue remains open. After the issue closes, you cannot withdraw.

WHAT IS THE 3 DAY RULE FOR IPO?

The 3 day rule refers to the quick turnaround of allotment and refunds after issue close. Allotment, refunds, and listing steps normally finish in about three working days. People often refer to timelines like T+3 for this flow.

WHAT WILL HAPPEN TO MY MONEY IF I DON’T GET IPO?

Your money stays blocked during the bidding. If allotment does not occur, the blocked funds return to your bank account. The release happens without manual action by you.

WHAT IS THE 90 DAY RULE FOR IPO?

After listing, companies follow strict reporting and disclosure rules. For the first 90 days, regulators watch closely for correct disclosures and compliance. These steps protect investors and support fair markets.

HOW TO INCREASE YOUR CHANCES OF IPO ALLOTMENT

Retail allotment often involves chance. Still, you may improve odds.

• Apply at the cutoff price in a book building issue.
• Use ASBA or UPI with the right block limit.
• Avoid multiple applications under the same PAN. Multiple entries lead to rejection.
• Use family members’ accounts to have more valid applications, each under a unique PAN.
• Apply in the retail quota rather than the HNI quota if you qualify as retail.
• Don’t split bids across the same PAN to try gaming the allotment.

IS IPO ALLOTMENT PURE LUCK?

Retail allotment uses a lottery or pro rata method when demand is high. When oversubscription occurs, chance plays a role. Still, following best practices improves your valid participation.

DOES IPO ALWAYS GIVE PROFIT?

No. IPO returns vary. Some list above the issue price. Some list below. Long term returns depend on company results, industry factors, and market sentiment.

IS IT POSSIBLE TO LOSE MONEY IN IPO?

Yes. You can lose money if the listing price falls below the issue price or if the market cuts the stock after listing. Long term losses happen if the company underperforms.

HOW IPO PRICING AFFECTS RETURNS

Fixed price issues may underprice shares. That may give listing gains quickly. Book building lets market bids set price. This method aims for fairer matching of supply and demand.

EXAMPLE

Suppose IPO issue price equals ₹100. If the share lists at ₹140, your listing gain equals ₹40 per share. If you had 100 shares, your quick profit equals ₹4,000. If the share lists at ₹80, you face a loss of ₹20 per share.

FAQ SECTION, SIMPLE ANSWERS

Q. What is IPO allotment process for retail investors?
A. If demand stays within supply, investors get full allotment. If oversubscribed, allotment follows lottery or pro rata rules.

Q. What happens to unsold shares?
A. Underwriters may buy unsold shares or the company may retain them based on the agreement.

Q. What is a DRHP?
A. DRHP is the Draft Red Herring Prospectus. It lists company details and risk factors before final approval.

Q. What is flipping?
A. Flipping means selling shares soon after listing for a quick profit.

IPO GREY MARKET PREMIUM, GMP

GMP stands for Grey Market Premium. It shows how much investors in an unofficial market are willing to pay before listing. GMP gives an early hint of market sentiment.

Points to note:

• High GMP signals strong demand and a likely positive listing.
• Low or negative GMP signals weak demand and a possible listing discount.
• GMP is unofficial and risky. Use GMP only as a small signal, not as the main reason to invest.

IPO GMP DISCLAIMER

GMP values shown on websites are informational only. They do not represent official market prices. Grey market trades have no regulator. Always base investment choices on company fundamentals and official documents.

SEBI’S WHEN-LISTED PLATFORM, 2025 UPDATE

In early 2025, SEBI launched a regulated “when-listed” platform. The platform allows pre-listing trading of IPO shares in a regulated setting. Goals include:

• Better price discovery, using a regulated market.
• More transparency for investors.
• Less reliance on grey markets.
• Higher investor trust and market integrity.

This platform changes how pre-listing interest shows up. It gives a legal venue for early price signals.

RISKS TO WATCH

• Market volatility. Prices may swing widely in the first days.
• Business risk. The firm might underperform its projections.
• Lock-in rules. Promoter or anchor shares may be locked, affecting supply.
• Overexposure. Do not allocate too high a share of your portfolio to one IPO.

PRACTICAL CHECKLIST BEFORE YOU APPLY

• Read the DRHP and the final prospectus.
• Check revenue, profit, and debt trends.
• Study promoter history and management track record.
• Check industry trends and peer performance.
• Decide entry strategy: short listing gain or long term hold.
• Limit allocation by your risk appetite.
• Use ASBA or regulated payment routes only.
• Consult a financial advisor for doubts.

COMMON FAQS, CLEAR ANSWERS

Q. Who sets the IPO price?
A. In fixed price IPOs the issuer sets the offer price. In book building, bids help set the final price.

Q. What happens on oversubscription?
A. Oversubscription leads to allotment by lottery or pro rata rules. Refunds issue for unallotted amounts.

Q. What is flipping?
A. Flipping means selling shares shortly after listing for quick profits. It brings high short term risk.

Q. Is IPO allotment guaranteed?
A. No. Allotment is not guaranteed for retail investors when demand is high.

Q. Where do I find GMP?
A. GMP values appear on informal forums and some financial pages. Treat them as informal signals. Rely on official documents for decisions.

FINAL WORD

An IPO offers an entry point into a growing company. It offers both quick profit and long term reward. It also carries risk. Do homework. Read the prospectus. Check fundamentals. Treat GMP as a hint, not proof. Apply with a limit that suits your risk appetite. Hold the stock long term if the business case stays strong.

Disclaimer
Information on this page is for education only. You should check details with your advisor before taking any investment step. Market values change. Past results do not promise future returns. IPOalertsIndia.com is not responsible for any loss.