How Companies Raise Money Through IPOs?

For a growing company, there comes a point when the founders may need far more money than they can comfortably raise from their own savings, bank loans or private investors.

They might want to build new factories, expand into new markets, repay debt, invest in technology or acquire another company.

One option is to go public.

This is where an Initial Public Offering (IPO) comes in.

An IPO allows a company to offer its securities to the public for the first time through the primary market. The company can raise capital from a broad pool of investors, while investors receive ownership in the company through shares.

For commerce students, understanding the IPO process explained in simple terms is useful because an IPO brings together accounting, corporate finance, investment banking, securities markets, valuation and financial reporting.

And there is much more happening behind an IPO than simply seeing a stock appear on the NSE or BSE.

What Is an IPO?

IPO stands for Initial Public Offering.

It is the process through which a privately held company offers securities to public investors and becomes publicly listed.

Before an IPO, ownership is generally concentrated among founders, promoters, employees, venture capital investors, private equity investors and other existing shareholders.

After the IPO, shares can be held and traded by public investors.

The company becomes subject to greater disclosure, regulatory and reporting requirements as a listed entity.

The NSE describes the IPO as a primary-market transaction through which companies can raise capital from investors. Once listed, shareholders can generally exit their investments through the secondary market.

Why Do Companies Go Public?

Going public is a major corporate decision.

Companies may choose an IPO for several reasons.

1. Raising Capital

The most obvious reason is access to capital.

A company can use IPO proceeds for purposes such as:

• Business expansion
• New manufacturing facilities
• Technology investments
• Working capital
• Debt repayment
• Acquisitions
• General corporate purposes

The exact use of funds is disclosed in the offer documents.

2. Funding Future Growth

A successful IPO can provide a company with access to a much larger capital market.

This can be particularly useful for companies operating in capital-intensive or rapidly growing industries.

3. Providing an Exit to Existing Investors

An IPO can also provide liquidity to early investors.

Depending on the structure of the offering, existing shareholders may sell some of their shares through an Offer for Sale (OFS).

This is different from a fresh issue because the money from an OFS generally goes to the selling shareholders rather than to the company.

4. Improving Visibility

A stock-market listing can increase a company’s visibility among customers, employees, lenders, investors and business partners.

For growing companies, that visibility can have strategic value.

5. Creating a Publicly Traded Currency

Listed shares can sometimes be useful in acquisitions, employee compensation and other corporate transactions.

Fresh Issue vs Offer for Sale

This is one of the first distinctions commerce students should understand.

Fresh Issue	Offer for Sale
New shares are issued	Existing shares are sold
Money goes to the company	Money goes to selling shareholders
Increases the company’s share capital	Does not create new shares
Can provide funds for expansion	Can provide liquidity to existing investors

An IPO can contain a fresh issue, an OFS, or a combination of both, depending on the offer structure.

How Does the IPO Process Work?

The IPO process involves multiple stages.

A simplified version looks like this:

Company prepares → Merchant bankers appointed → DRHP filed → Regulatory review → RHP issued → IPO opens → Investors bid → Price discovered → Shares allotted → Company lists

Let’s understand each stage.

Step 1: The Company Decides to Go Public

Going public isn’t something a company should decide overnight.

Management first evaluates whether the business is ready.

It needs to consider:

• Financial performance
• Growth prospects
• Corporate governance
• Internal controls
• Regulatory requirements
• Investor expectations
• Reporting capabilities

NSE notes that a company preparing for listing needs stronger internal processes, systems, reporting and compliance capabilities because a public company faces greater external scrutiny.

This is a major transition.

A private company primarily answers to a relatively small group of owners.

A public company has thousands or potentially millions of shareholders watching its performance.

Step 2: Investment Bankers Are Appointed

The company generally works with merchant bankers, also known as Book Running Lead Managers (BRLMs) in a book-built issue.

They play an important role in the IPO.

Their responsibilities can include:

• Structuring the issue
• Advising the company
• Coordinating due diligence
• Helping prepare offer documents
• Marketing the issue
• Coordinating with regulators and exchanges
• Assisting with price discovery

Think of the merchant banker as one of the central coordinators of the IPO.

Step 3: Due Diligence Begins

Before shares are offered to the public, a detailed examination of the company takes place.

This can cover:

• Financial statements
• Legal matters
• Business operations
• Existing debt
• Material contracts
• Promoter information
• Litigation
• Regulatory matters
• Risks
• Corporate governance

The objective is to ensure that important information is properly disclosed to prospective investors.

This is one reason commerce and accounting professionals play an important role in IPO preparation.

Step 4: The DRHP Is Prepared

The company prepares an important document known as the Draft Red Herring Prospectus (DRHP).

It contains extensive information about the company and proposed issue.

A DRHP can include:

• Business overview
• Industry information
• Financial statements
• Risk factors
• Promoter information
• Capital structure
• Objects of the issue
• Management discussion
• Outstanding legal proceedings
• Financial performance

The document gives investors a detailed picture of the company before they decide whether to participate.

Step 5: Regulatory and Exchange Review

The draft documents go through the applicable regulatory and exchange processes.

The company may receive observations or queries that need to be addressed before proceeding.

NSE’s current listing process describes stages including filing the DRHP/DP, preliminary checks, responding to exchange queries and obtaining in-principle approval.

This stage can involve substantial documentation and coordination.

Step 6: The RHP Is Issued

Before the IPO opens, the company issues a Red Herring Prospectus (RHP).

It contains important information about the issue and company, although certain final pricing details are determined through the applicable issue process.

SEBI’s investor education material explains that the DRHP contains issue information before the final price is determined, while the RHP is issued before the IPO opens.

For investors, the RHP is not something to ignore.

It contains the information needed to understand the business, risks and proposed offering.

Step 7: The Price Band Is Announced

In a book-built IPO, investors are generally given a price band.

For example:

₹450 – ₹475 per share

This means investors can bid within the specified range according to the issue terms.

The price band is important because it establishes the range within which price discovery takes place.

Step 8: The IPO Opens for Bidding

Once the issue opens, eligible investors can submit bids.

Investors generally specify:

• Number of shares
• Bid price

Retail investors may also choose the cut-off option in applicable book-built issues.

SEBI explains that book building allows investors to bid within the price band and that the final price is determined based on demand.

What Is Book Building?

Book building is one of the most important concepts in the IPO process.

In simple terms:

Book building is a mechanism used to discover an appropriate issue price based on investor demand.

Imagine a company offers shares within a price band of ₹100 to ₹120.

During the bidding period:

• Some investors bid at ₹100
• Others bid at ₹105
• Others bid at ₹115
• Some may bid at ₹120

The investment bankers analyse the demand at different prices.

This helps determine the final issue price.

NSE describes book building as a mechanism where investor bids are collected at different prices and the offer price is determined after the bidding process.

Step 9: Price Discovery

After the bidding period ends, demand is analysed.

Suppose the company offered 10 lakh shares.

If demand is strong at ₹115 but much weaker at ₹100, the price discovery process helps determine an appropriate final issue price based on the applicable rules.

The final price is known as the issue price.

This is different from the company’s future stock-market price.

That’s important.

An IPO price does not guarantee what the shares will trade at after listing.

Step 10: Share Allotment

Once the IPO closes and the final price is determined, shares are allotted according to the applicable allocation rules.

If an IPO is heavily oversubscribed, an investor may receive fewer shares than they applied for—or none.

The unused amount is released according to the applicable process.

SEBI’s investor guidance notes that investors bidding below the cut-off price may not receive allotment, while oversubscription can result in investors receiving fewer shares than they applied for.

Step 11: Listing on the Stock Exchange

After the IPO process is completed, the company’s shares are listed on a recognised stock exchange.

This is when the company’s shares become available for trading in the secondary market.

From this point, market forces determine the trading price.

The share price can move above or below the IPO price depending on:

• Investor expectations
• Company performance
• Market conditions
• Industry trends
• Demand and supply
• Economic conditions

IPO Process at a Glance

Stage	What Happens
1	Company decides to go public
2	Merchant bankers are appointed
3	Due diligence begins
4	DRHP is prepared and filed
5	Regulatory and exchange review
6	RHP and issue details are made available
7	Price band is announced
8	IPO opens for bidding
9	Book building and price discovery
10	Shares are allotted
11	Shares are listed
12	Trading begins in the secondary market

What Happens to the Money Raised?

This depends on whether the IPO includes a fresh issue or an offer for sale.

Fresh Issue

The company receives the proceeds from the fresh issue, subject to issue expenses and the terms disclosed in the offer document.

It may use the funds for purposes such as:

• Expansion
• Capital expenditure
• Debt repayment
• Working capital
• Acquisitions
• General corporate purposes

Offer for Sale

In an OFS, existing shareholders sell their shares.

The proceeds generally go to those selling shareholders rather than the company.

This distinction is crucial when evaluating an IPO.

A company raising ₹2,000 crore through an IPO does not necessarily receive ₹2,000 crore for its own operations.

You need to check how much is a fresh issue and how much is an OFS.

What Commerce Students Should Look for in an IPO?

Don’t just look at the IPO’s price band.

There is much more to analyse.

Revenue Growth

Is the company’s revenue consistently increasing?

Profitability

Are margins improving or declining?

Cash Flow

Is the business actually generating cash?

Debt

Does the company have a manageable debt burden?

Return Ratios

Look at measures such as:

• ROE
• ROCE
• ROA

Promoter Holding

Understand who owns the company before and after the IPO.

Use of IPO Proceeds

Find out exactly how the company intends to use fresh capital.

Valuation

Compare the company’s valuation with similar listed companies.

Risk Factors

Read the risk section carefully.

It is often much more informative than promotional discussions around the IPO.

Why the RHP Matters So Much?

An IPO can generate enormous excitement.

News headlines may focus on:

• Subscription numbers
• Grey market premiums
• Listing expectations
• Celebrity investors
• Market buzz

But a commerce student should develop a different habit.

Read the offer document.

The RHP provides detailed information about the company’s business, financial position and risks. SEBI also advises investors to carefully read the RHP/prospectus and related application documents before investing.

That’s where the real analysis begins.

IPO Subscription Does Not Mean Guaranteed Success

An IPO being oversubscribed does not automatically mean the company is a good long-term investment.

Similarly, weak subscription numbers don’t necessarily prove that a company is fundamentally poor.

Subscription reflects demand during a particular period.

Long-term value depends on the underlying business.

A company needs to continue generating revenue, profits and cash after listing.

That’s where financial analysis becomes more important than IPO excitement.

IPO Price vs Listing Price

These two terms are often confused.

IPO Price

The price at which shares are offered to investors during the IPO.

Listing Price

The price at which the shares begin trading on the stock exchange.

They can be different.

For example:

IPO price: ₹500

Listing price: ₹620

The shares listed at a premium.

But the opposite can also happen.

IPO price: ₹500

Listing price: ₹450

The stock listed below its issue price.

There is no guaranteed relationship between the two.

What Are the Risks of an IPO?

IPOs can provide investment opportunities, but they also carry risks.

A company may face:

• Slower-than-expected growth
• Strong competition
• Regulatory changes
• Rising costs
• Debt problems
• Customer concentration
• Technology disruption
• Economic downturns
• Corporate governance issues

There is also valuation risk.

An excellent business can still be a poor investment if investors pay an excessively high price for it.

That’s a lesson worth remembering.

A good company and a good investment are not always the same thing.

IPO vs Private Funding

Companies have several ways to raise capital.

Factor	Private Funding	IPO
Investors	Limited group	Public investors
Regulation	Comparatively private	Extensive public-market requirements
Disclosure	Limited public disclosure	Significant disclosure
Liquidity	Usually limited	Shares can trade publicly
Investor Base	Smaller	Much broader
Public Visibility	Lower	Higher
Compliance	Lower public-market burden	Ongoing listed-company obligations

Going public isn’t automatically better than private funding.

It depends on the company’s stage, objectives and readiness.

Why IPOs Matter to the Economy?

IPOs connect companies that need capital with investors who have capital.

This is one of the core functions of the capital market.

The company gets access to funding.

Investors get an opportunity to participate in the company’s ownership.

Successful public companies can then use capital to expand, invest, hire employees and build new assets.

The broader capital market benefits from this flow of money between investors and businesses. NSE describes the primary market as a channel through which issuers raise capital, while the secondary market provides liquidity for investors.

Career Opportunities Connected to IPOs

If you enjoy IPO analysis, several finance careers may interest you.

Investment Banking

Investment bankers help companies prepare and execute capital-market transactions.

Equity Research

Equity research analysts study listed companies and estimate their financial performance and value.

Transaction Advisory

Professionals support companies and investors with financial due diligence and transaction analysis.

Corporate Finance

Corporate finance teams evaluate funding options and capital allocation decisions.

Accounting and Audit

Financial reporting and assurance are critical parts of the IPO preparation process.

Legal and Compliance

Public offerings require significant regulatory and legal coordination.

For CA and CMA students, IPOs are particularly interesting because they sit at the intersection of accounting, finance, valuation and capital markets.

Skills Commerce Students Can Build

If you want to understand IPOs professionally, focus on these skills:

• Financial statement analysis
• Ratio analysis
• Corporate finance
• Business valuation
• Financial modeling
• Excel
• Annual report analysis
• Capital market knowledge
• Research skills
• Business writing

You don’t need to master everything at once.

Start with annual reports.

Pick a company that recently went public and try to understand its business before looking at its stock price.

That exercise alone can teach you a lot.

A Simple Way to Analyse an IPO

Before forming an opinion about an IPO, ask:

Business

• What does the company actually do?
• How does it make money?
• Who are its competitors?

Financials

• Is revenue growing?
• Are margins improving?
• Is cash flow healthy?
• How much debt does it have?

Valuation

• What is the IPO valuation?
• How does it compare with peers?
• Is the growth rate high enough to justify the valuation?

IPO Structure

• How much is a fresh issue?
• How much is an OFS?
• Why is the company raising money?
• Where will the proceeds go?

Risks

• What could go wrong?
• Are there customer or supplier concentration risks?
• Are there legal or regulatory issues?

This approach is far more useful than simply asking, “Will this IPO list at a premium?”

Frequently Asked Questions

What does IPO stand for?

IPO stands for Initial Public Offering. It is the process through which a company offers securities to public investors for the first time through the primary market.

How does an IPO raise money for a company?

When a company issues new shares through a fresh issue, investors pay for those shares and the company receives the proceeds, subject to the issue structure and expenses. An IPO may also include an Offer for Sale, where existing shareholders sell their shares.

What is the difference between an IPO and a stock listing?

An IPO is the process of offering securities to investors. Listing is the process through which the company’s securities become available for trading on a stock exchange after the offering process.

What is book building in an IPO?

Book building is a price-discovery mechanism where investors submit bids within a specified price band. Demand at different prices is used to determine the final issue price.

What is a DRHP?

DRHP stands for Draft Red Herring Prospectus. It is a detailed draft offer document containing important information about the company, its business, financials, risks and proposed issue.

What is an RHP?

RHP stands for Red Herring Prospectus. It is the offer document issued before the IPO opens and contains important information for prospective investors.

What is a fresh issue?

A fresh issue involves the company issuing new shares. The proceeds from those shares are raised by the company for the purposes disclosed in the offer documents.

What is an Offer for Sale?

An Offer for Sale, or OFS, involves existing shareholders selling their shares to investors. The proceeds generally go to those selling shareholders rather than the company.

Can an IPO list below its issue price?

Yes. The listing price is determined by market demand and supply once trading begins. It can be above, equal to or below the IPO issue price.

Is an IPO always a good investment?

No. An IPO can involve significant investment risk. Investors should study the company’s financials, valuation, business model and risk factors rather than relying only on subscription numbers or market excitement. NSE also cautions that stock-market investments do not guarantee returns.