Stock MarketIntermediate

Chapter 13 of 15

IPOs — How to Apply and Evaluate

Applying for IPOs in India and evaluation criteria.

12 min read Chapter 13

Anita's phone buzzed at 7 AM: "Zomato IPO subscription opens today!" She'd seen the buzz for weeks — analysts on TV, articles on Moneycontrol, her office colleagues talking about listing gains. But she had no idea how to actually apply for an IPO, what "lot size" meant, or how to evaluate whether an IPO was worth applying for. By the time the subscription closed three days later, she understood the entire process — and made an informed decision rather than a FOMO-driven one.

What Is an IPO?

IPO (Initial Public Offering):

An IPO is the process by which a private company offers its shares to the general public for the first time, and lists on a stock exchange (BSE or NSE). It is how companies transition from being privately owned to publicly traded.

OFS (Offer for Sale):

In an OFS, existing shareholders (promoters, private equity investors) sell their shares to the public. The company receives no new money — the proceeds go to the selling shareholders. An IPO can be a Fresh Issue, an OFS, or a combination of both.

Fresh Issue vs OFS — Where Does the Money Go?

Aspect	Fresh Issue	Offer for Sale (OFS)
Who receives the proceeds	The company itself	Existing shareholders (promoters / PE funds)
Impact on equity	New shares created — dilutes existing shareholders	No new shares — ownership changes hands only
Company benefit	Company gets fresh capital to fund growth	Company gets no money
Investor signal	Company needs growth capital — potentially positive	Promoters/investors exiting — warrants scrutiny
Example	Nykaa IPO 2021 — raised ₹630 crore in fresh issue for growth	LIC IPO 2022 — government selling existing shares

Key IPO Terms

Price Band:

The range within which investors can bid for shares. The lower end is the "floor price" and the upper end is the "cap price." For book-built IPOs, you must bid between these two prices. Most investors bid at the cap price to maximise allotment chances.

Lot Size:

The minimum number of shares you must apply for in an IPO. You cannot apply for a fraction of a lot — only in multiples of the lot size. SEBI ensures each lot is worth approximately ₹13,000–₹15,000.

ASBA (Application Supported by Blocked Amount):

ASBA is the mandatory method for applying to IPOs in India. Instead of transferring money to the company, ASBA instructs your bank to "block" the application amount. The money stays in your bank account earning interest until allotment — it is debited only if you receive an allotment. If not allotted, the block is released automatically.

GMP (Grey Market Premium):

The Grey Market Premium is the unofficial, unregulated premium at which IPO shares trade before listing. GMP indicates the market's expectation of listing price. A GMP of ₹50 on a ₹100 IPO price suggests the market expects it to list around ₹150.

Example: LIC IPO — Price Band, Lot Size, ASBA

The LIC (Life Insurance Corporation of India) IPO in May 2022 — India's largest-ever IPO:

Price Band: ₹902 – ₹949 per share (policyholders got a ₹60 discount: ₹889)
Lot Size: 15 shares
Application Amount per lot (retail, at cap price): ₹949 × 15 = ₹14,235
ASBA process: When Anita applied for 1 lot, ₹14,235 was blocked in her HDFC Bank account. She continued earning savings account interest on this money for the 7-day period until allotment.
Allotment: At the end of the subscription period, allotment was done via lottery for oversubscribed retail portions. If Anita wasn't allotted shares, the ₹14,235 block was released within 6 working days — she never lost the funds.
Listing: LIC listed at ₹872 — below the issue price — a listing loss. This illustrates why evaluating IPO fundamentals matters, not just listing day hype.

Step-by-Step: Applying for an IPO

Check IPO details — Open Zerodha IPO page, Groww, or SEBI's website for the prospectus, price band, and subscription dates
Ensure sufficient bank balance — Have at least 1 lot × cap price in your bank account
Apply via broker platform — On Zerodha Kite: Menu → IPO → Select the IPO → Enter number of lots and price (bid at cap price for best allotment chances)
UPI mandate — Confirm the UPI mandate on your BHIM/PhonePe/Google Pay app within the specified time (usually within 30 minutes)
Check allotment status — On IPO allotment date (typically 6 days after subscription closes), check on the registrar's website (KFin Tech, Link Intime) or via BSE/NSE
Listing day — If allotted, shares appear in your Demat account on listing day (T+6 from closing date)

How to Evaluate an IPO — Go Beyond GMP

GMP is speculation — never decide based on it

Grey Market Premium operates entirely outside SEBI's regulatory framework. GMP can be heavily manipulated by operators. Stocks with a high GMP (like ₹200+ above issue price) often trade lower after listing once the initial hype dies. Never apply for an IPO solely because of a high GMP — evaluate the actual business.

Key questions to ask before applying for any IPO:

Is it a fresh issue or OFS-heavy? Heavy OFS (promoters exiting) is a yellow flag.
Are the valuations reasonable? Compare P/E and P/S with listed peers.
Revenue and profit growth trend? Check the DRHP (Draft Red Herring Prospectus) filed with SEBI — 3 years of financials are disclosed.
Use of proceeds? Debt repayment is less exciting than growth capex.
Anchor investor quality? Presence of large institutional funds (FDC Mutual Fund, SBI MF, foreign funds) as anchor investors signals confidence.

Treat IPOs like any regular stock — fundamentals first

The best IPO strategy is to filter for businesses you'd be happy to hold for 3–5 years at the IPO price. If listing gains are a bonus — great. But many exciting IPOs (Paytm, LIC, Delhivery) listed below or near their issue price and tested investor patience for years. Business quality is the only durable advantage.

Quick Quiz

What does ASBA stand for in the context of IPO applications in India?

Key Takeaways

An IPO can be a Fresh Issue (company gets money), OFS (existing shareholders exit), or a combination — scrutinise heavy OFS components.
ASBA blocks your application money without debiting it — you earn interest during the subscription period and the block is released if not allotted.
GMP (Grey Market Premium) is unregulated speculation — many high-GMP IPOs disappoint on listing; evaluate the fundamental business, not the hype.
Read the DRHP on the SEBI website for 3 years of financial data, business risks, and use of IPO proceeds before applying.

Ch 12: Sectors and Cyclicals

Ch 14: Stock Market Taxation in India