IPO FAQs

Welcome to the GMP of IPO FAQ section. Here, we address common questions about Initial Public Offerings (IPOs) to help investors navigate the IPO landscape with clarity.

1. What is an IPO?

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. This allows the company to raise capital from public investors and become a publicly traded company listed on a stock exchange.

2. How does an IPO work in India?

In India, the IPO process involves several steps:

  1. Draft Red Herring Prospectus (DRHP): The company files a DRHP with the Securities and Exchange Board of India (SEBI), detailing its business operations, financials, and risks.

  2. Approval from SEBI: SEBI reviews the DRHP and provides its observations. The company may need to address any concerns raised.

  3. Red Herring Prospectus (RHP): After SEBI’s approval, the company files the RHP, which includes the price band and other final details.

  4. IPO Launch: The company opens its IPO for subscription, allowing investors to apply for shares.

  5. Allotment and Listing: After the subscription period ends, shares are allotted to successful applicants, and the company gets listed on the stock exchange.

3. What is the difference between a Fixed Price and Book Building IPO?

  • Fixed Price IPO: The company sets a fixed price at which shares are offered to the public.

  • Book Building IPO: The company sets a price band, and investors bid within this range. The final price is determined based on the demand and bids received.

4. Who are Anchor Investors?

Anchor Investors are Qualified Institutional Buyers (QIBs) who are allotted shares a day before the IPO opens to the public. Their early investment builds confidence in the issue and helps attract retail and other investors. Up to 60% of the QIB portion can be allocated to anchor investors, including mutual funds.

5. What is the role of SEBI in an IPO?

The Securities and Exchange Board of India (SEBI) is the regulatory body overseeing the IPO process in India. SEBI ensures that the process is fair and transparent for all parties involved. It mandates companies to meet certain eligibility criteria, disclose necessary information, and adhere to guidelines to protect investor interests.

6. What is the minimum bidding period for a book-built IPO?

According to SEBI guidelines, a book-built IPO must remain open for at least three working days. This window allows investors enough time to evaluate the offer, analyze company fundamentals, and submit or revise their bids. The bidding period may be extended depending on market response or regulatory decisions.

7. What is the Grey Market Premium (GMP)?

The Grey Market Premium (GMP) is the premium amount at which shares of a company are traded in the grey market before their official listing on stock exchanges. It reflects the perceived demand and value of an IPO among investors even before the shares hit the public market.

For instance, if an IPO is priced at ₹500, and its GMP is ₹100, the market expects the stock to list around ₹600.

8. What is the difference between Fresh Issue and Offer for Sale?

  • Fresh Issue: The company issues new equity shares to raise capital.

  • Offer for Sale: Existing shareholders, such as promoters or investors, sell their shares to the public without the company raising any new capital.

9. What is the role of the IPO Registrar?

The IPO Registrar is responsible for managing the IPO process, including collecting applications, allocating shares, processing refunds for unsuccessful applicants, and transferring allotted shares to successful applicants’ Demat accounts.

10. What is the role of IPO Lead Managers?

Lead Managers are financial intermediaries appointed by the company to manage the IPO process. They assist in drafting the prospectus, determining the price band, marketing the issue, and ensuring compliance with regulatory requirements.

11. What is the difference between the Primary and Secondary Market?

  • Primary Market: The market where new securities are issued and sold to the public for the first time, such as in an IPO.

  • Secondary Market: The market where existing securities are bought and sold among investors, such as the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

12. What is the IPO Prospectus Life Cycle?

The IPO Prospectus Life Cycle includes:

  1. Preparation: The company prepares the Draft Red Herring Prospectus (DRHP) and files it with SEBI.

  2. Review: SEBI reviews the DRHP and provides its observations.

  3. Finalization: After addressing SEBI’s observations, the company files the Red Herring Prospectus (RHP).

  4. Subscription: The IPO opens for subscription, allowing investors to apply for shares.

  5. Allotment and Listing: Shares are allotted to successful applicants, and the company gets listed on the stock exchange.

13. Is it mandatory to have a PAN Number to apply for an IPO?

Yes, it is mandatory to have a Permanent Account Number (PAN) to apply for an IPO. Investors must ensure that they cross-check the PAN after filling the form, as any error can lead to the cancellation of the application.

14. Can minors apply for an IPO?

Yes, minors can apply for an IPO through their guardians. The guardian must apply on behalf of the minor and provide necessary documents, including the minor’s PAN and Demat account details.

15. Can I apply for an IPO through multiple applications under the same name?

No, you cannot apply for an IPO through multiple applications under the same name. If an investor tries doing it, all the applications made under the same name will be rejected.

16. What is the Basis of Allotment?

The Basis of Allotment is a document published by the IPO Registrar that provides information about the final price of the IPO, demand or bidding information, and the share allocation ratio. It helps investors understand the allotment process and whether they have received shares.

17. How is the IPO investment taxed?

According to the Income Tax Act, if shares allotted in an IPO are sold within the holding period of 12 months, the realized gain or loss will be taxable as short-term capital gains or loss.

18. What are the categories in which IPO allotment applications can be made?

  • Retail Individual Investor (RII): Investors applying for up to ₹2 lakh.

  • Non-Institutional Investor (NII): High-net-worth individuals applying for over ₹2 lakh.

  • Qualified Institutional Buyer (QIB): Institutional entities like mutual funds, banks.

Each category has a reserved quota, and investors must apply under their respective categories.

19. Can private limited companies apply for an IPO?

Yes