Chapter 13 of 15
IPOs - How to Apply and Evaluate
Applying for IPOs in India and evaluation criteria.
Ganesh's Twitter feed had exploded. "GMP ₹220!" "Already subscribed 47×!" "Listing gains of 40% confirmed?"
Some company he'd never heard of was having its IPO and everyone seemed to be losing their minds. His Zerodha account was ready. His ₹12,000 was sitting there. He wanted in.
But he had no idea what GMP meant, how to actually apply, or whether this was a real opportunity or hype. Good instinct to pause and ask. Let's figure this out.
What Is an IPO?
An IPO is when a private company offers its shares to the public for the first time and gets listed on a stock exchange. It's how companies raise money from regular investors, and how those investors get a chance to own a piece of a growing business.
Before an IPO, a company's shares are private, owned only by founders, early investors, and VCs. The general public can't buy them. An IPO changes that.
The company works with investment banks to:
- Decide how many shares to sell and at what price (the "issue price")
- File a Draft Red Herring Prospectus (DRHP) with SEBI, think of it as the company's full disclosure document
- Open a subscription window (usually 3 days) for investors to apply
- Allot shares to successful applicants
- List the shares on NSE/BSE for regular trading
The Price Band: How IPO Pricing Works
Companies don't set one fixed price. They set a price band, a range like ₹180–₹192 per share. You apply at the "cut-off price" (meaning you'll accept whatever price is finally set within the band) or at a specific price within the band.
The final issue price is set at the top of the band or wherever demand is strongest. Most heavily subscribed IPOs price at the top of the band.
A hypothetical IPO: Sunrise Logistics Ltd. Price Band: ₹290–₹305. Lot Size: 49 shares. Minimum Investment: 49 × ₹305 = ₹14,945 (at cut-off). Subscription Dates: June 10–12. The "lot size" is the minimum number of shares you must apply for. You can't apply for 30 shares, it has to be 49, or 98, or 147 (multiples of the lot). This means IPOs have a minimum ticket size, usually ₹13,000–₹15,000.
How to Apply: The UPI ASBA Method
SEBI mandates a system called ASBA (Application Supported by Blocked Amount). Your money doesn't leave your bank account during the application period, it just gets blocked. If you don't get allotment, the block is released and the money is yours again.
Since 2022, retail investors must apply through the UPI ASBA method:
Step 1: Log in to your broker app (Groww, Zerodha, etc.) and navigate to the IPO section.
Step 2: Find the IPO you want and click "Apply." Enter the number of lots and your price (usually select "cut-off").
Step 3: Enter your UPI ID (PhonePe/GPay/BHIM/Paytm UPI). Submit the application.
Step 4: You'll receive a UPI mandate request in your UPI app. Accept it within the time limit (usually 24 hours, but accept immediately). This blocks the money in your bank.
Step 5: Wait for allotment day (usually T+6 from IPO close date).
Step 6: Check allotment on the registrar's website (e.g., KFintech, Bigshare Services) using your PAN. If allotted, shares appear in your demat on listing day minus 1. If not allotted, the block on your bank account is released.
A very common mistake: applicants fill in the IPO form but forget to accept the UPI mandate in their payment app. If you don't accept the mandate within the window, your application is automatically rejected. Check your UPI app immediately after applying.
What Is GMP? Should You Trust It?
GMP is the price at which IPO shares are being traded in the unofficial "grey market" before listing. It's completely unregulated, informal, and illegal, but widely tracked as a sentiment indicator.
If the issue price is ₹305 and GMP is ₹220, people in the grey market are paying ₹305 + ₹220 = ₹525 for the shares before they list. This suggests strong demand and potential listing at ₹525+.
The problem: GMP can and does lie. It reflects the enthusiasm of grey market participants, often speculators trying to profit from hype. Many IPOs with high GMP list below expectations. GMP is entertainment, not analysis.
GMP is unregulated and easy to manipulate. People with large allotments have every incentive to talk up GMP to sell their shares at a high listing price. There's no legal recourse if GMP-based expectations don't materialise. Use GMP to gauge general market sentiment, nothing more.
Subscription Numbers: What 47× Subscribed Means
During the IPO period, SEBI releases subscription data showing how many times the offered shares have been applied for.
"47× subscribed" means investors applied for 47 times more shares than available. This sounds great, but it means your odds of allotment are roughly 1 in 47 (if every application is for one lot and you're a retail investor).
| Subscription Level | Allotment Odds | What It Means |
|---|---|---|
| Under 1× (undersubscribed) | You definitely get allotment | Low demand, often a red flag |
| 1–10× | High chance of allotment | Moderate demand |
| 10–50× | Low odds, lottery system | Popular IPO |
| 50×+ | Very low odds, pure lottery | Frenzy, often overpriced |
Retail applicants (applying up to ₹2 lakhs worth) are treated as a separate category. SEBI ensures allotment is done by lottery for retail investors once oversubscription exceeds certain levels, so each application gets one shot at one lot, regardless of how many lots you apply for.
Implication: Applying for one lot is as good as applying for five lots in terms of allotment probability for retail investors in heavily subscribed IPOs.
Listing Gains vs Long-Term Investment
IPO investing has two very different strategies:
Listing gain strategy: Apply, list, sell on day one if price is above issue price. This is speculation, not investing. It works in bull markets, fails in bear markets. Many IPOs from 2021 (Paytm, Zomato) listed at massive discounts.
Long-term investment strategy: Evaluate the business from the DRHP, decide if you'd want to own this company for 5+ years, and buy if the valuation is attractive. Treat the IPO like buying any listed stock, just earlier.
Zomato's IPO (2021) issued at ₹76. Listed at ₹116 (+52% listing gain). Retail investors who flipped made money. Then the stock fell to ₹40 by 2022 as profitability questions emerged. Long-term investors who held through the dip saw Zomato recover and trade above ₹200 by 2024, but only if they had conviction and patience. The listing gain crowd exited at ₹116. The patient investor who bought at ₹40 in panic made 5× in 2 years. Same IPO. Very different outcomes depending on strategy.
Always select "cut-off price" when applying unless you have a specific reason to bid below the price band ceiling. Cut-off means you'll accept whatever the final issue price is. Bidding below the ceiling risks your application being ignored if the price is set above your bid.
How to Evaluate an IPO: Not Just Chase Hype
Before applying for any IPO, read at least these sections of the DRHP (available on SEBI's website and the registrar's site):
- Business overview: What does this company actually do? Does it have a competitive advantage?
- Financial performance: Has revenue grown consistently over 3 years? Is it profitable, or burning cash?
- Promoter background: Who runs the company? Any red flags (pledging of shares, legal disputes)?
- Valuation: Compare the P/E ratio at issue price with listed peers. Is it cheaper, in line, or more expensive?
- Purpose of the IPO: Is the money raised going into the business (fresh issue) or are existing investors cashing out (offer for sale)? Too much OFS is a warning sign.
In an IPO, "fresh issue" means the company raises new money for growth. "Offer for sale (OFS)" means existing shareholders (VCs, promoters) are selling their stake, the company gets nothing. A 100% OFS IPO is basically promoters cashing out. Not automatically bad, but worth noting. Look for a healthy mix of fresh issue and OFS.
Common IPO Mistakes
- Applying just because it's popular: Popularity and listing price aren't the same as business quality.
- Missing the UPI mandate: Your application gets auto-rejected.
- Applying for multiple lots hoping for better odds: In oversubscribed retail categories, 1 lot = 5 lots in allotment probability.
- Selling immediately without a reason: If you liked the company at ₹305, why sell at ₹330? Only sell if the thesis changes or you need the money.
- Never reading the DRHP: The red flags are always in the prospectus. Most people who lose money on IPOs never read it.
Key Takeaways
- An IPO is a company's first sale of shares to the public: it's how they raise capital and you get early ownership
- Apply via UPI ASBA through your broker: money is only blocked, not debited, until allotment
- Accept the UPI mandate immediately after applying or your application will be rejected
- GMP is unregulated hype: use it as sentiment indicator only, never as the basis for a decision
- In heavily subscribed IPOs, applying for 1 lot = 5 lots in terms of allotment odds for retail investors
- Always check: fresh issue vs OFS, promoter quality, financials, and valuation vs listed peers
Want to evaluate the business behind an IPO properly? Read Fundamental Analysis next.
In a heavily oversubscribed IPO, you apply for 5 lots. Your friend applies for 1 lot. Who has a better chance of getting allotment?
Disclaimer: This article is for educational purposes only and does not constitute personalized financial advice. Investments are subject to market risks. Past performance does not guarantee future returns. Please consult a SEBI-registered investment adviser before making investment decisions.