An IPO is the one part of the market that arrives with its own marketing budget, which is worth remembering before anything else. Everybody involved in bringing it to you is paid whether or not it works out for you.
That does not make IPOs bad. It makes them the part of investing where the information you receive is least neutral, and where knowing the mechanics matters more than usual.
What is actually happening in an offer
Two very different things get called an IPO and the difference decides where your money goes.
A fresh issue creates new shares and the money raised goes into the company — to repay borrowing, build capacity, or fund working capital. You are funding the business.
An offer for sale creates nothing. Existing holders — founders, early investors, a private equity fund — sell part of their stake, and the money goes to them. The company's bank balance is unchanged the day after listing.
Most Indian offers are a mix, and the split is stated plainly in the prospectus. It is the first thing worth looking up, because a large offer for sale is not automatically bad and it does tell you something: people who know the business best have decided this is a reasonable price to sell at. They may be diversifying, they may be exiting a fund with a deadline, or they may think the price is generous. All three are possible and the third is not rare.
The price band itself is set by the company and its bankers after gauging institutional interest. It is not a valuation anybody independent arrived at, and it is set to get the issue sold.
The allotment is a lottery, and oversubscription cuts both ways
The retail portion works differently from what most people assume, and the mechanics matter.
Retail applicants bid in lots, and if the retail portion is oversubscribed, allotment is decided by a computerised draw rather than proportionally. Below a certain level of demand everybody gets something. Above it, most applicants get nothing at all — and applying for more lots does not improve your odds in the way people expect, because the draw operates on applications rather than on size within the small-applicant category.
Which produces the situation that defines retail IPO investing in India. The offers you most want are the ones you are least likely to receive, and the offers you comfortably receive are the ones nobody wanted.
That is not a small observation. If you apply to everything, your actual holdings will be systematically weighted towards the weakest offers, because those are the ones with allotment available. The average outcome of a strategy is not the average outcome of the offers — it is the average of the ones you got.
The practical version is to decide what you would want to own for its own sake, apply to that, and skip the rest. Applying to everything is not diversification here, it is adverse selection with extra steps.
Listing gains, and what they are compensating for
A large share of retail applicants have no intention of holding. They apply for the listing pop and sell on day one, which is a legitimate approach as long as you know what it is.
Being clear about the mechanism: an issue is typically priced a little below what the bankers believe the market will bear, because an offer that fails to sell is a disaster for everybody arranging it, and one that jumps modestly is a success story. The listing gain, where it exists, is partly the price of ensuring the issue got taken up.
Three things to be honest about if this is your approach. It is a short-horizon activity with a binary outcome, not investing, and treating it as investing is how people end up holding something they never wanted. It is dominated by allotment odds — a large gain on a tiny allotment is a small amount of money. And weak markets close this window entirely: the same offer that would have listed higher in a strong quarter can list below its price when sentiment turns, and there is no way to know in advance which quarter you are in.
The mirror error is worse and more common. Somebody applies for a listing gain, the listing disappoints, and instead of selling they decide to “hold it long term” — converting a failed short-term bet into a long-term holding they never analysed. If you would not have bought it to hold, a bad listing is not a reason to start.
What to read, and the questions it answers
The prospectus is long, publicly available, and almost nobody opens it. You do not have to read all of it. Five things are worth finding.
The use of proceeds. Stated explicitly. Money for capacity or debt repayment is a different proposition from money going to selling shareholders, and the document tells you the split.
Three years of financials. Revenue and profit trends, and specifically whether profit appeared recently. A company that turned profitable in the year before filing is common and worth a second look, because the incentive to look good in that year is obvious.
The risk factors section. Legally required, written by lawyers, and therefore unusually candid. Customer concentration, pending litigation, regulatory dependencies and related-party transactions all appear here because they must. It is the least promotional part of the entire document.
Promoter holding after the issue, and any lock-in expiry dates. A large tranche becoming sellable some months after listing is a supply event you can see coming.
The valuation comparison. The document lists comparable listed companies and their ratios against the issue's. It is chosen by the company, so treat it as a starting point, but a band far above every comparison is asking you to accept something the peers do not justify.
A demat account to apply from
Funds are blocked rather than debited until allotment. Free to open
Application procedures, category limits and allotment rules are set by SEBI and the exchanges and change from time to time — check current rules rather than relying on this description. This is educational material, not advice, and nothing here is a recommendation to apply to any particular offer. We run no tips group and no signal service, we manage nobody's money, and no return is promised.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
How is the retail allotment decided?
If the retail portion is oversubscribed, allotment is by a computerised draw rather than proportionally, so most applicants receive nothing. Below that level of demand, applicants generally receive a full allocation. Applying for more lots does not improve your chances the way people assume.
Does applying to every IPO improve my odds?
It worsens what you end up owning. The offers with allotment readily available are the ones with weak demand, so a blanket approach systematically fills your holdings with the least wanted issues. Decide what you would want to own anyway, and apply only to that.
Are listing gains reliable?
No. Issues are often priced a little below what the market will bear because a failed offer is worse for the bankers than a modest jump, but that is a tendency and not a rule. In weak markets offers list below their price regularly, and there is no way to know in advance which market you are applying into.
What is the difference between a fresh issue and an offer for sale?
A fresh issue creates new shares and the money goes to the company. An offer for sale is existing holders selling their stake, and that money goes to them rather than to the business. Most Indian offers mix the two, and the prospectus states the split explicitly.
Should a beginner apply to IPOs at all?
There is no rule against it, but it is an odd place to start. You are assessing a company with no listed price history, on a document written to sell the offer, against a valuation set by the seller. Learning to judge an established listed business first makes the IPO version of the question far easier.
Related Reading
- The charges that apply once you own it
- Reading the financials in a prospectus
- Comparing a valuation against peers
- Lock-ins, splits and other supply events
- Judging a company before judging an offer
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
