Initial Public Offering (IPO): Process, Allotment Rules, and Mechanics
An initial public offering (IPO) is the process through which an unlisted company issues shares to the public for the first time, leading to the listing of its equity on a recognized stock exchange. The issuer may already operate as an unlisted public company under the Companies Act, 2013. The transaction allows the business to raise fresh equity capital, enables existing shareholders to sell holdings, or combines both objectives. Following the offering, the company’s shares are admitted to dealings on stock exchanges, with ownership transferred electronically through depository participants connected to nsdl or CDSL.
In India, initial public offerings are governed by the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations). Popular financial commentary often portrays public issues as guaranteed entry points for immediate listing gains. In market reality, an initial public offering is a corporate capital-raising mechanism. It carries equity valuation risks, execution challenges, and general market volatility. Shares can list at prices below the issue price, resulting in immediate capital losses for subscribers.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. Dhanvantri Capital Services Private Limited is not a registered stockbroker and does not accept, process, or execute IPO bid applications. This page provides regulatory explanations, statutory allocation rules, and tax frameworks for Tax Year 2026-27. It evaluates no specific company, analyzes no upcoming issue, and sets no course of action. The choice is yours
How the Indian IPO process works: regulatory milestones
A public issue in India follows a structured legal sequence governed by SEBI regulations and the Companies Act, 2013.
The operational lifecycle progresses through distinct regulatory milestones
(21 Days)
(T+1)
(T+2)
(T+3)
1. Merchant Banker Due Diligence and DRHP Drafting
The company appoints SEBI-registered Category I merchant bankers to act as Book Running Lead Managers (BRLMs). The lead managers conduct independent legal and operational due diligence, review material contracts, examine financial statements, and draft the offer document. Merchant bankers verify that disclosures are adequate; they do not replace the statutory auditors who audit the company’s financial books.
2. Public Comments and SEBI Observation Period
The issuer files the Draft Red Herring Prospectus (DRHP) with SEBI and the stock exchanges. These documents enter two separate regulatory stages:
Public Comment Period: The DRHP is hosted on the websites of SEBI, the lead managers, and the stock exchanges for at least 21 days to invite public comments.
SEBI Regulatory Review: SEBI independently examines the document to verify compliance with disclosure standards. The regulator may issue observations or mandate changes to risk factors and capital history.
SEBI observations do not constitute an official endorsement of the IPO. SEBI does not guarantee the financial soundness of the issuer, the accuracy of statements, or the commercial viability of the offering.
3. Roadshows and Marketing
Following regulatory clearance, corporate executives and lead managers conduct institutional roadshows. These presentations explain business operations, balance sheet health, and expansion plans to institutional funds. Roadshows assist underwriters in assessing demand across institutional segments.
4. Filing the Red Herring Prospectus (RHP)
Once SEBI observations are incorporated, the company files the Red Herring Prospectus with the Registrar of Companies (RoC). The RHP contains complete disclosures regarding operations, promoter track records, material litigation, and capitalization, but omits the final issue price. An abridged prospectus, summarizing key features and risk disclosures, accompanies the standard application forms.
5. Price Band and Floor Price Announcement
If the price band is not stated in the RHP, the issuer must announce the floor price or price band at least two working days before the issue opening date across major national newspapers. The spread between the floor price and the cap price cannot exceed 20 percent. For example, a floor price of ₹100 allows a maximum cap price of ₹120.
6. The Bidding Window and the ASBA System
The public bidding window remains open for at least three working days. In India, applications must be submitted through the Application Supported by Blocked Amount (ASBA) facility.
ASBA operates through two primary application routes:
Direct Bank ASBA: Investors submit physical forms or use net banking through Self-Certified Syndicate Banks (SCSBs) where they hold accounts.
UPI ASBA: Individual investors submitting applications up to ₹5 lakh through registered stockbrokers or online platforms block funds using a Unified Payments Interface (UPI) mandate.
Under ASBA, money remains in the applicant’s bank account, earning normal savings interest until allotment occurs. Funds are debited only if shares are allotted.
7. The Mandatory T+3 Listing Schedule
SEBI circular dated 9 August 2023 made the T+3 listing timeline mandatory for public issues:
T Day (Issue Close): Bidding closes. On mainboard issues, bidding closes at 5:00 PM.
T+1 Day (Basis of Allotment): The designated stock exchange and registrar finalize the basis of allotment.
T+2 Day (Electronic Share Credit): Funds are debited from allotted applicants, electronic share credits reach investor Demat accounts, and unblocking instructions are processed for unallotted funds.
T+3 Day (Listing): Equity shares commence live trading on the National Stock Exchange and BSE India.
Investor categories and statutory allocation quotas
In a book-built public offering, SEBI ICDR Regulations establish two alternative eligibility routes, each with different category quotas:
Mainboard Allocation Routes: Regulation 6(1) vs Regulation 6(2)
Regulation 6(1) Route: Available to companies meeting strict financial thresholds, including at least ₹3 crore in net tangible assets in each of the preceding three years, an average operating profit of at least ₹15 crore across the preceding three years, and a net worth of at least ₹1 crore in each preceding year.
Regulation 6(2) Route: Available to issuers that do not satisfy the profitability track record under Regulation 6(1). To protect retail investors, the law alters the category quotas, allocating most of the issue to institutional investors.
| Investor Category | Regulation 6(1) Quotas | Regulation 6(2) Quotas | Maximum Application Threshold |
|---|---|---|---|
| Qualified Institutional Buyers (QIB) | Maximum 50% of net offer | Minimum 75% of net offer | Not specified |
| Non-Institutional Investors (NII) | Minimum 15% of net offer | Maximum 15% of net offer | Net offer size |
| Retail Individual Investors (RII) | Minimum 35% of net offer | Maximum 10% of net offer | ₹2,00,000 |
| Anchor Investor Quota | Up to 60% of QIB portion | Up to 60% of QIB portion | Minimum ₹10 cr |
Anchor Investor Allocations and the 2025 Reservation Amendment
Anchor investors are institutional buyers that subscribe to large blocks of shares on the day preceding the public issue opening. The allocation is decided by the issuer in consultation with the Book Running Lead Managers.
Under the SEBI ICDR Regulations (incorporating the Third Amendment, 2025), specific sub-reservations govern the anchor category:
Up to 60 percent of the QIB portion can be allocated to anchor investors.
A mandatory 40 percent reservation operates within the anchor portion: 33.33 percent is reserved for domestic mutual funds, and 6.67 percent is reserved for life insurance companies and pension funds.
If the insurance and pension fund quota is under-subscribed, the residual portion can be allocated to domestic mutual funds.
Anchor shares carry lock-in rules: 50 percent of allotted shares are locked for 30 days, while the remaining 50 percent are locked for 90 days from the date of allotment.
The presence of anchor investors confirms institutional interest, but does not guarantee secondary market price stability. Institutional participation patterns are explored under anchor investor frameworks.
Non-Institutional Investors (NII)
Non-Institutional Investors include high-net-worth individuals, non-resident Indians, companies, and trusts applying for amounts exceeding ₹2 lakh.
The NII category is split into two operational segments:
Small NII (sNII): Applications valued between ₹2 lakh and ₹10 lakh. One-third of the NII quota is reserved for this group.
Big NII (bNII): Applications valued above ₹10 lakh. Two-thirds of the NII quota is reserved for this group.
Both segments operate under the proportionate allocation framework, subject to allocating the minimum application lot to successful bidders. Institutional bidding structures are examined across non institutional investors guidelines.
Retail Individual Investors (RII)
Under Regulation 2(1)(ee), a Retail Individual Investor is defined as an individual who applies or bids for securities valued at not more than ₹2,00,000. Retail participants can bid at the cut-off price, allowing them to participate without specifying a price within the band. Total retail equity distribution depends directly on the company’s total issue size.
Oversubscription and the allotment mechanics
Oversubscription occurs when total bid demand exceeds the shares offered by the company. When an issue receives bids for more shares than are available, statutory allotment rules take effect.
Retail Category Allotment: The Minimum Lot Rule
In the retail category, allotment is governed by the minimum lot principle:
Ensuring Maximum Individual Allottees: The priority is to allot at least the minimum application lot to as many unique applicants as possible.
Computerized Draw of Lots: If the number of unique retail applicants exceeds the total available minimum lots, a computerized lottery selects the successful applicants.
Lottery Allocation: Every successful applicant selected in the draw receives at least one minimum bid lot.
Treatment of Residual Shares: If shares remain after distributing one minimum lot to every successful applicant, the remaining shares are allotted proportionately among applicants who bid for more than one lot.
Worked Example: Retail Draw of Lots
Consider an IPO offering 1,00,000 retail shares with a minimum bid lot of 20 shares. This structure creates exactly 5,000 available minimum lot slots.
Suppose 25,000 unique individual applicants apply for shares:
Under these specific assumptions, each unique applicant has a 20 percent probability of being drawn in the lottery. Bidding for 10 lots (e.g., ₹1,40,000) does not provide a ten-fold advantage over an applicant bidding for 1 lot (₹14,000) during a heavily oversubscribed lottery. Each winning applicant receives their initial lot before any residual distribution occurs.
NII Category Allotment: Proportionate Mechanics
Allotment across both Small NII and Big NII categories follows a proportionate allocation framework, subject to regulatory minimums:
The allotment ratio is determined by dividing the available shares in that sub-category by the total shares applied for.
Each successful applicant must receive at least the minimum NII application lot.
If oversubscription in the sNII segment exceeds the number of available minimum lots, a computerized draw of lots is held to allot the minimum lot size to drawn applicants.
In the bNII segment, shares are allotted proportionately among successful bidders, with fractional entitlements managed under standard rounding conventions.
Fresh issue vs Offer for Sale (OFS) vs Follow-on Public Offering (FPO)
Public offerings are structured using different transactional components. A public issue can consist of a fresh issue, an offer for sale, or a combination of both.
The table below clarifies the distinctions between these capital structures:
| Transaction Parameter | Fresh Issue (within IPO or FPO) | Offer for Sale (OFS) (within Public Issue) | Separate Stock Exchange OFS |
|---|---|---|---|
| Issuer Status | Unlisted (IPO) or Listed (FPO) | Unlisted (IPO) or Listed (FPO) | Already listed company on exchanges |
| Destination of Capital | Funds flow directly to company balance sheet | Proceeds go entirely to selling shareholders | Proceeds go entirely to selling promoters/investors |
| Impact on Equity Capital | New shares created; expands paid-up capital | Existing shares transferred; share count unchanged | Existing shares transferred; share count unchanged |
| Regulatory Filing | Full DRHP and RHP filed with SEBI and RoC | Included within the public issue offer document | Notice filed with exchanges; no full prospectus |
| Bidding Channel | Standard ASBA syndicate and UPI bidding | Standard ASBA syndicate and UPI bidding | Direct trading screen via designated stockbroker |
A Follow-on Public Offering (FPO) is a subsequent public issue made by an already listed company. Like an IPO, an FPO can contain fresh shares to raise corporate capital, an offer for sale to reduce promoter holdings, or a mixture of both.
When an IPO consists entirely of an Offer for Sale, the company receives zero proceeds from the public offering. The capital flows directly to the private equity funds, promoters, or early investors who are selling their stakes.
IPOs vs New Fund Offerings (NFO)
A frequent retail error is confusing an Initial Public Offering with a New Fund Offering. While both represent initial capital subscriptions, they involve fundamentally different assets.
An IPO sells equity ownership in an individual commercial business. The company’s future share performance depends on its earnings, balance sheet debt, corporate management, and economic competition. An investor who purchases IPO shares owns equity in that single operating enterprise.
A new fund offering issues units in a mutual fund scheme. An NFO does not represent shares in a commercial enterprise. Instead, the capital pooled from unitholders is managed by a mutual fund to build a diversified portfolio of dozens of listed stocks, corporate bonds, or government paper under SEBI scheme guidelines.
While many open-ended mutual fund schemes offer units at an initial price of ₹10, that figure is a nominal accounting value, not an indicator of valuation. Mutual fund units are valued daily at their prevailing net asset value.
Mainboard vs SME platform IPOs: updated regulatory framework
The Indian capital markets operate two parallel listing frameworks: the Mainboard and the Small and Medium Enterprises (SME) platforms (NSE Emerge and BSE SME).
Operative SME Rules (NSE Circular 07/2025, Effective 1 July 2025)
Under the revised framework applicable on 31 October 2026, the rules governing SME IPOs were updated by exchange directives:
Individual Investor Category: For individual applicants, the old retail structure was replaced by an “Individual Investor” category.
Minimum Application Threshold: An Individual Investor must apply for exactly two lots, with the aggregate application value strictly exceeding ₹2,00,000.
Reclassification to NII: Any application submitted for more than two lots is automatically categorized under the Non-Institutional Investor (NII) segment.
No Cut-Off Bidding: Cut-off bidding is not permitted in SME public issues; all applicants must enter a specific bid price.
No Bidding Modifications: Bid cancellations and downward bid modifications are prohibited.
Bidding Hours: Bidding closes at 4:00 PM on the final issue day, while UPI mandate confirmations are accepted until 5:00 PM.
Underwriting Mandate: The issue must be 100 percent underwritten, with the lead merchant banker underwriting at least 15 percent of the total issue size on its own account.
The table below contrasts Mainboard and SME platform parameters
| Operational Parameter | Mainboard IPO | SME Platform IPO (Operative as of late 2026) |
|---|---|---|
| Governing Regulation | SEBI ICDR Regulations Chapters II & III | SEBI ICDR Chapter IX and Exchange Listing Rules |
| Paid-Up Capital Requirement | Minimum post-issue capital (e.g. ₹10 crore on NSE) | Post-issue paid-up capital cannot exceed ₹25 crore |
| Minimum Individual Application | 1 bid lot (typically ₹14,000 to ₹15,000) | Exactly 2 lots (application value strictly above ₹2 lakh) |
| Permitted Bidding Options | Cut-off bidding allowed for retail applicants | Specific price bidding mandatory; cut-off prohibited |
| Bid Flexibility | Revisions and cancellations allowed within hours | Cancellations and downward revisions prohibited |
| Final-Day Bidding Cut-Off | 5:00 PM for bidding entries | 4:00 PM for bidding entries (UPI confirmation to 5:00 PM) |
| Secondary Market Trading | Single shares traded on regular exchange screens | Standardized minimum lot blocks traded on screen |
On 14 October 2026, SEBI released a consultation paper proposing further structural changes to the SME IPO framework, including revised eligibility criteria, governance norms, and trading lot rationalization. These proposals remain under public consultation and are not yet notified regulations.
Essential IPO terminology: capital structures and legal terms
Navigating public issue documents requires an understanding of statutory corporate finance concepts:
1. Book Running Lead Manager (BRLM)
A merchant banker registered under Category I with SEBI, appointed by the issuer to manage the public offering. The BRLM coordinates due diligence, prepares offer documents, handles regulatory filings, organizes marketing, and oversees allotment
2. Underwriting and Minimum Subscription
Underwriting is a contractual arrangement where merchant bankers or syndicate members agree to subscribe to unsold securities if market demand falls short of statutory thresholds:
Mainboard Minimum Subscription: Under SEBI ICDR Regulations, a public issue must achieve a minimum subscription of 90 percent of the offer size.
Consequences of Failure: If the 90 percent subscription threshold is not reached and underwriters do not fulfill contractual underwriting commitments, the company must refund all application monies within the statutory timeframe.
Underwriting Agreements: Underwriting is not automatic; it is governed by the specific terms and exclusions set out in the underwriting agreement signed between the issuer and the lead managers.
3. Green Shoe Option (Stabilizing Mechanism)
Under Regulation 57 of the SEBI ICDR Regulations, an issuer can utilize a Green Shoe option to stabilize post-listing share prices:
The company appoints one of the lead managers as the stabilizing agent.
Promoters lend existing equity shares to the stabilizing agent, allowing the allocation of up to 15 percent beyond the base issue size.
If secondary market prices fall below the issue price post-listing, the stabilizing agent purchases shares from the market using the overallotment cash, creating buying support.
Statutory Window: The stabilization mechanism operates for a maximum duration of 30 days from the date on which trading permission is granted by the recognized stock exchanges.
4. Authorized Capital vs Paid-Up Capital
Under the Companies Act, 2013, corporate capital is legally classified:
Authorized Share Capital: The maximum nominal value of shares that a company is authorized to issue under its Memorandum of Association.
Paid-Up Share Capital: The total amount of money paid or credited as paid up on the shares issued to shareholders. When an IPO issues fresh equity, paid-up capital rises.
5. Preference Shares vs Preferential Allotment
These two concepts represent distinct corporate finance mechanisms:
Preference Shares: A class of share capital that gives holders preferential rights regarding dividend distributions and repayment of capital upon company liquidation. Preference shareholders do not have ordinary voting rights, but Section 47 of the Companies Act, 2013 provides statutory voting rights on resolutions that directly affect their rights, or on all resolutions if dividends remain unpaid for two or more years.
Preferential Allotment: A method of issuing fresh shares or convertible securities to a selected group of individuals or institutions on a private basis under Section 42 and Section 62 of the Companies Act, 2013 and Chapter V of the SEBI ICDR Regulations. It is an allotment route, not a class of share capital.
Direct tax framework for IPO shares upon secondary sale
Allotment of shares in an initial public offering does not trigger an immediate capital gains tax liability. Direct tax applies when the allottee subsequently sells or transfers those shares on the secondary market.
For Tax Year 2026-27 under the Income-tax Act, 2025, capital gains on listed equity shares are assessed based on the holding period and Securities Transaction Tax (STT) status:
1. Short-Term Capital Gains under Section 196
If an investor sells allotted IPO shares on listing day or within 12 months of the allotment date:
The gain is classified as a short-term capital gain.
Under Section 196 of the Income-tax Act, 2025, net qualifying short-term capital gains from equity transactions where STT is paid at the time of sale are taxed at a flat rate of 20 percent (plus 4 percent health and education cess and applicable surcharge).
Statutory computation steps are outlined under short term capital gains tax on shares.
2. Long-Term Capital Gains under Section 198
If an investor holds allotted IPO shares for more than 12 months before executing a sale on a recognized stock exchange:
The gain is classified as a long-term capital gain.
The Acquisition STT Condition: Under Section 198, concessional long-term rates generally require Securities Transaction Tax to be paid on both the acquisition and transfer of equity shares. However, central government notifications issued by the Central Board of Direct Taxes specifically exempt shares acquired through an IPO allotment from the acquisition-STT requirement, because STT is not chargeable on initial corporate allotments.
Statutory Rate: Net long-term capital gains exceeding the aggregate annual threshold of ₹1,25,000 are taxed at 12.5 percent without indexation benefits (plus 4 percent cess and applicable surcharge).
The ₹1,25,000 threshold applies to the aggregate qualifying long-term equity gains realized across all equity and mutual fund sales in the tax year, not separately to each company. Complete statutory holding schedules are detailed across long term capital gain tax on shares.
Evaluating an IPO: key disclosure areas
Assessing an initial public offering requires objective analysis of disclosures in the offer documents:
Fresh Issue vs Offer for Sale: Check the proportion of funds entering corporate operations versus funds exiting to selling promoters or private equity investors.
Objects of the Issue: Examine how fresh capital will be deployed. Productive capital expenditure and debt reduction strengthen balance sheets, whereas vague allocations for general corporate purposes warrant scrutiny.
Financial Trends and Working Capital: Analyze three-year revenue growth, operating cash flows, operating margins, and debtor collection periods in the financial statements.
Risk Factors and Litigation: Review Chapter V of the RHP to evaluate customer concentration, raw material dependencies, regulatory audits, and pending tax litigation.
Initial public offerings involve equity market risks. Scrutinizing offer documents provides an objective basis for investment decisions.
The choice is yours.
Common Questions
Under SEBI ICDR Regulations, a retail individual investor can apply for a maximum aggregate value of up to ₹2,00,000 in a public issue. Bids exceeding ₹2,00,000 are classified under the Non-Institutional Investor (NII) category.
Under NSE Circular 07/2025 applicable from 1 July 2025, Individual Investors must bid for exactly two lots, with the application value strictly exceeding ₹2 lakh. Bids for more than two lots are categorized as NII.
Under the standard Regulation 6(1) route, the QIB allocation is capped at a maximum of 50 percent of the net offer. Under the alternative Regulation 6(2) route, the QIB allocation must be at least 75 percent of the net offer.
Anchor investors face a two-tier lock-in: 50 percent of the allotted shares are locked for 30 days, while the remaining 50 percent are locked for 90 days from the date of allotment.
Under Section 196 of the Income-tax Act, 2025, net gains realized on listed equity shares held for 12 months or less are classified as short-term capital gains and taxed at a flat rate of 20 percent (plus 4 percent cess and applicable surcharge) where STT is paid upon sale.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.