IPO process in India

4.3.1 Follow the money: fresh issue vs offer for sale

Every "public issue" is one of two things, or a mix:

• Fresh issue: the company creates new shares and sells them. Money goes into the company. Share count rises and existing owners are diluted.
• Offer for sale (OFS): existing shareholders (promoters, PE funds, government) sell shares they already own. Money goes to the sellers, and the company receives none of it. Share count is unchanged.

It's the first thing you check on any IPO's front page, because it changes the story completely. A fresh issue says "we need capital to grow", and your next question is for what, and at what return. A pure OFS says "the owners want out, at this price", and you ask why.

India's biggest IPOs have often been pure OFS. Hyundai Motor India's ~₹27,900 crore IPO (October 2024) was India's largest ever, and it sold not one new share. Every rupee went to the Korean parent (illustrative figures, so check against the RHP on SEBI/NSE). LIC's 2022 IPO was likewise 100% OFS by the Government of India.

What else counts as a primary market deal?

Several other transactions are primary-market in character. A rights issue offers new shares to existing holders pro-rata, usually at a discount. A QIP is India's fast-track sale of new shares to institutions only. A preferential allotment, in India, places new shares with chosen investors, subject to a SEBI-regulated pricing floor. Follow-on public offers belong here too. So do US ATM programs ("at-the-market", dribbling new shares into the order book) and PIPEs, which are private placements into public companies. A buyback is the primary market in reverse: the company returns cash and retires shares. In every case, ask the same two questions. Who got the money? And what happened to the share count? You will formalise the accounting in Phase 1 and the capital-allocation judgment in Phase 3.

4.3.2 The Indian IPO: book building + ASBA, step by step

India's process is rule-based to an unusual degree, with quotas, price-band limits, lottery allotment and blocked-money payments, all under SEBI's ICDR Regulations. The sequence:

1. DRHP. The company files a Draft Red Herring Prospectus with SEBI: business description, risk factors, financials, object of the issue, promoter details. It goes public on sebi.gov.in the day it's filed. Analysts read DRHPs the way scouts read game film.
2. SEBI observations, then the RHP. SEBI issues comments, and they are disclosure-focused, since SEBI does not certify that the IPO is a good investment. The company then files the final Red Herring Prospectus with everything except the final price. Both markets use the term "red herring", which comes from the red-ink legend on a preliminary prospectus.
3. Price band. A band is announced, ₹1,865–1,960 in Hyundai's case. Under SEBI's rules the cap must be 105–120% of the floor, so the band is at least 5% wide and at most 20%. Price discovery happens inside this band. Unlike in the US, it cannot be raised above the cap without re-opening the issue.
4. Anchor day. One day before opening, anchor investors, meaning large institutions, are allotted up to 60% of the institutional quota at a fixed price. Anchor shares are then locked in, 50% of them for 30 days and the rest for 90 days. The anchor list is public and is read as a quality signal. Analysts look at which institutions anchored, and at what price.
5. The three-day book. The issue stays open for at least three working days. Bidders place bids at prices within the band. Retail bidders may simply bid "at cut-off", accepting whatever price is discovered. Live subscription numbers by category update on NSE/BSE throughout, so watch the QIB book on day 3. Institutions can revise bids up but cannot withdraw, while retail can withdraw until close.
6. Quotas. In a standard profitable-company IPO, Qualified Institutional Buyers (QIBs), meaning mutual funds, insurers, FPIs and banks, get at most 50%. Non-Institutional Investors, who bid above ₹2 lakh, get at least 15%. Their share is split internally, one-third for ₹2–10 lakh "small HNI" bids and two-thirds above ₹10 lakh. Retail, meaning individual bids up to ₹2 lakh, gets at least 35%. Companies without the profitability track record use the alternative route: QIB ≥ 75%, NII ≤ 15%, retail ≤ 10%. Check which route an issue uses, because a 75% QIB floor changes who must show up for the issue to survive.
7. ASBA payment. Under Application Supported by Blocked Amount, your application money never leaves your bank account. It is blocked, for retail typically via a UPI mandate, and debited only for shares actually allotted. Nobody issues refund cheques and nobody earns float. ASBA is mandatory for all categories.
8. Price discovery & allotment. The cut-off price is set where cumulative demand fills the book, which in hot issues means at the cap. Everyone pays the same final price. QIB and NII allotment is proportionate. In oversubscribed issues, retail allotment is a lottery of minimum lots (mechanics in Worked Example 3).
9. T+3 listing. Since December 2023, allotment, refunds/unblocking, demat credit, and listing are compressed into three working days after close. Listing day has a special pre-open call auction to discover the opening price.
10. After listing. The promoter's "minimum contribution", 20% of post-issue capital, is locked for 18 months, and other pre-IPO shares for 6 months. The company must reach 25% minimum public shareholding within prescribed timelines, and mega-issuers get longer. Grey-market premium (GMP) chatter, the unofficial pre-listing price, is sentiment. Don't mistake it for analysis.

4.3.3 The US IPO: the bookrunner process

The US process runs on the Securities Act of 1933, and it's discretion-based where India's is rule-based:

1. S-1. This is the registration statement filed with the SEC on EDGAR, the US sibling of the DRHP. Foreign issuers file an F-1 instead. Most issuers first file confidentially and flip public at least 15 days before the roadshow.
2. SEC comments. Comment letters go back and forth. Like SEBI, the SEC reviews disclosure and leaves investment merit to you.
3. The syndicate. Underwriters are led by one or more bookrunners, and "lead left" is the alpha bank on the prospectus cover. In a firm-commitment underwriting they buy the entire issue from the company at the offer price minus the gross spread, then resell it to investors. That spread has historically been ~7% for mid-size deals and 2–3.5% for mega-deals. It's the fee.
4. Roadshow & book building. Management and bankers pitch institutions for one to two weeks against a price range in the amended S-1. The bookrunners build a demand book: who wants how much at what price.
5. Pricing. The night before trading, the company and bookrunners set the price. There's no band cap, so the price can land anywhere relative to the range, above it included. Airbnb moved its range from $44–50 to $56–60 and then priced at $68.
6. Allocation is discretionary. The bookrunners choose who gets stock, favouring long-term institutions, or so the theory goes. There's no retail quota and no lottery, and US retail typically gets little or nothing at the offer price. Compare that with India's mandated 35%.
7. Greenshoe. The underwriters get a 30-day over-allotment option for ~15% extra shares, which doubles as a price-stabilisation tool in early trading. India's ICDR permits a green-shoe too, but it's rarely used.
8. Lock-up. Insiders typically sign 180-day contractual lock-ups. That's a negotiated term, where India's promoter lock-in is regulatory. Watch the calendar, because lock-up expiry adds float.
9. First trade. The stock opens via NYSE's DMM-run auction or Nasdaq's opening cross. For a big IPO that's often hours after the 9:30 bell, and often far above the offer price. The average US IPO's first-day pop has run 10–20% across decades (Jay Ritter's data, listed in Resources).

Two more doors onto the exchange are worth knowing by name only. A direct listing has no new shares and no underwritten book, as with Spotify in 2018. A SPAC is a listed cash shell that merges with a private company. SPACs boomed in 2020–21 and then largely collapsed. Recognise the terms for now, since the analysis toolkit comes later.

4.3.4 India vs US IPO: the analyst's contrast table

What is the IPO underpricing puzzle?

The underpricing puzzle, held in your head from both sides. A big first-day pop means the seller left money on the table, and in Airbnb's case roughly $4bn of it (Worked Example 1). Is that a transfer from the company to the bookrunners' favourite clients? Or is it the unavoidable cost of getting a deal done under uncertainty, or even deliberate marketing, since "a hot open buys years of goodwill"? The evidence is mixed.

Your own concern is narrower, and you can test it. The IPO price is a negotiated, marketed number, so never treat it as an anchor for value. Within a year, the market's own order book will have repriced the company far from the offer price, in either direction.