Primary Market and IPOs: A Beginner's Guide to How Companies Go Public in India

Have you ever wondered how a private company like Ola or Swiggy becomes a publicly-traded entity on the stock exchange? The journey from a private firm to a public powerhouse happens in the primary market, and the most common route is through an Initial Public Offering (IPO). For investors, IPOs can be an exciting opportunity to get in on the ground floor of a company’s growth story.

This guide will walk you through everything a beginner to intermediate investor in India needs to know about the primary market and IPOs.

Key Highlights

• Primary vs. Secondary Market: The primary market is where companies issue new shares to the public to raise capital. The secondary market (e.g., NSE, BSE) is where investors trade these already-issued shares among themselves.
• What is an IPO? An IPO is the process where a private company offers its shares to the public for the first time, transitioning into a publicly-listed company.
• Applying for an IPO: Indian investors can easily apply for IPOs online through their brokers using methods like ASBA and UPI. The application limit for retail investors via UPI is ₹5 lakhs.

Primary vs. Secondary Market: The Key Difference

To understand IPOs, you first need to know the two parts of the stock market.

1. The Primary Market: Think of this as a car showroom selling a brand-new car for the first time. When a company needs to raise funds for expansion, debt repayment, or other corporate goals, it sells its own, new shares directly to investors. This first-time sale is a primary market transaction.

2. The Secondary Market: This is like a pre-owned car marketplace. Once the company sells its new shares in the primary market, those shares are then traded (bought and sold) among investors on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The company isn’t directly involved in these trades; money and shares are exchanged between investors. This is where the daily stock market action you hear about on the news takes place.

What is an IPO? A Company’s Public Debut

An IPO is a major milestone for any company. It’s the process of a private company “going public” by offering its shares to the general public for subscription.

Why do companies go public?

• To Raise Capital: This is the main reason. The funds can fuel business expansion, new product launches, or debt reduction.
• To Provide an Exit for Early Investors: Angel investors and venture capitalists who backed the company early on can sell their stakes and realize profits.
• To Enhance Brand Visibility and Credibility: Being listed on a stock exchange boosts a company’s prestige and public profile.

The Journey of an IPO: From Private to Public

The IPO process in India is a long and complex journey, strictly regulated by the Securities and Exchange Board of India (SEBI). Here are the key steps:

1. Appoint an Investment Bank: The company hires merchant bankers (investment banks) to manage the entire IPO process, from paperwork to marketing.
2. File the DRHP: The company and its bankers prepare a Draft Red Herring Prospectus (DRHP). This is a detailed document covering the company’s business, financials, potential risks, and the IPO’s objectives. It’s filed with SEBI for review.
3. SEBI Verification: SEBI scrutinizes the DRHP to ensure all disclosures are accurate and transparent, safeguarding investor interests.
4. Set the Price Band: After SEBI’s approval, the company announces a price band for its shares. The IPO then opens for a few days (typically 3-5), allowing investors to bid for shares within this price range. This demand-discovery process is called book building.
5. Finalize Allotment: Once the bidding closes, the final issue price is set. Shares are then allotted to investors. If the IPO is oversubscribed (demand exceeds supply), the allotment for retail investors is conducted through a computerized lottery system to ensure fairness.
6. List on the Stock Exchange: Finally, the shares are officially listed on the stock exchange, where they become available for trading in the secondary market.

How to Apply for an IPO: A Step-by-Step Guide for Indian Investors

Applying for an IPO is now a simple digital process. You will need a Demat and Trading account from a registered stockbroker. The primary method for application is ASBA (Applications Supported by Blocked Amount).

The ASBA Process: When you apply for an IPO via ASBA, the application amount isn’t immediately debited from your bank account. Instead, it is simply blocked.

• If you receive an allotment of shares, the corresponding amount is debited.
• If you don’t receive an allotment, the block is removed, and the funds are fully available to you again.

Applying with UPI: SEBI has streamlined the process further by integrating the Unified Payments Interface (UPI).

1. Log in to your broker’s app or website (e.g., Zerodha, Upstox).
2. Navigate to the IPO section and select the one you wish to apply for.
3. Enter your bid details (quantity of shares and price).
4. Enter your UPI ID.
5. You will receive a mandate request on your UPI app (e.g., Google Pay, PhonePe).
6. Approve the mandate with your UPI PIN. The funds will now be blocked in your bank account.

As per current SEBI regulations, retail investors can use UPI to apply for IPOs with a value of up to ₹5 lakhs.

Listing Day: The Moment of Truth for Investors

The day a stock lists on the exchange is filled with anticipation.

Issue Price vs. Listing Price:

• The issue price is the price at which shares were allotted to you in the IPO.
• The listing price is the price at which the stock begins trading on the exchange, determined by supply and demand during a special pre-open session.

Calculating Listing Gains (or Losses): If the listing price is higher than the issue price, you make a listing gain.

• Example: You were allotted shares at an issue price of ₹200. On listing day, the stock opens at ₹250. You’ve made a listing gain of ₹50 per share (a 25% profit).

However, a positive listing is not guaranteed. If market sentiment is weak or the IPO is perceived as overpriced, the stock can list below its issue price, resulting in a listing loss.

Conclusion: Your First Step into the Primary Market

IPOs offer a unique chance to invest in a company at the very beginning of its public life. The process, once complex, is now accessible to every retail investor in India thanks to digital platforms and UPI integration.

While the allure of listing gains is strong, it’s crucial to remember that not all IPOs are successful. Always research the company’s fundamentals by reading its DRHP, understand the risks involved, and invest based on your financial goals.

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This article is for informational purposes only and should not be considered investment advice. Please conduct your own research before investing.