INTRODUCTION

In today's financial landscape, companies frequently reach a point when their growth goals
cannot be met by private finance sources like venture capital, family money, or promoters.
Many businesses decide to go public at this point by first making their shares available to the
public, a process known as an initial public offering (IPO). This is an important turning point in a
company's history since it puts the business in the public and regulatory eye and creates new
opportunities for capital raising. A company's media coverage and reputation are also greatly
enhanced by an IPO. Often, the only way to finance quick expansion and growth is through an
IPO.A robust stock market and economy are indicated by a high number of initial public
offerings (IPOs).

A private firm can become publicly traded on a stock exchange, like the NSE or BSE in India,
through an initial public offering (IPO). In return, the business gets funding from a wide range of
investors, including high-net-worth individuals, institutional investors, and retail investors. IPOs
give investors the opportunity to get involved in the early phases of a company they support.
The funds obtained can be utilized by the business to finance plans for expansion, debt
reduction, infrastructure improvements, or even R&D.

Investors and the company have a direct interaction when the company becomes public for the
first time, and the money comes to the company as "Share Capital." As a result, shareholders
who participate in the company's initial public offering (IPO) acquire ownership rights over the
business. This is the biggest source of funding for a firm, allowing it to develop "Fixed Assets"
that will be used throughout the operation of the enterprise. The company's shareholders have
the option to withdraw their capital via the secondary market.

Raising money is only one aspect of the IPO process. It results in a change in the way the
business functions. A listed business is expected to maintain greater standards of governance
and transparency, is exposed to public and regulatory scrutiny, and is required to make periodic
disclosures. Long-term benefits may result from these adjustments, which frequently give the
company more financial discipline and strategic focus.

IPOs are particularly intriguing—and dangerous—because they are sometimes started while the
company's destiny is still being determined. Despite having a sound business plan and
encouraging development prospects, the company's profitability, regulatory landscape, and
market acceptability are all subject to change. IPOs might therefore be a mixed bag for
investors. Massive demand and significant listing profits have been observed for certain initial
public offerings (IPOs), such as those of IRCTC, TCS, and more recently, Nykaa. Others have let
them down by dropping below their issue price shortly after becoming public.

1
A key consideration in an initial public offering (IPO) is valuation, or the price at which shares
are offered for public subscription. Analysts, investment bankers, and business insiders
collaborate to identify a range of prices that they feel accurately represents the company's
value. But market perception frequently varies, which is where investor behavior—especially
among individual investors—comes into play. An IPO is frequently motivated by market buzz,
media attention, and even word-of-mouth, making it more than just a financial decision for
many retail investors. Retail interest might occasionally be influenced more by social media
excitement, subscription chatter, and grey market premiums (GMP) than by the company's real
core competencies.

IPOs are regarded as a fundamental component of a nation's capital market development since
they give investors fresh prospects and facilitate the transfer of wealth among various economic
sectors. They are a responsibility and an opportunity for businesses, one that, with careful
management, may provide the groundwork for sustained success.

Due to better access through digital platforms and mobile trading apps, retail involvement in
initial public offerings (IPOs) has increased in India in recent years. In addition, more modern
businesses—many of which are in the fintech or tech sectors and are not yet profitable—are
pursuing the initial public offering (IPO) route. This has raised awareness of the valuation of
these businesses and how investors see the risk vs. return ratio.

Brief history of IPOs in India

In order to raise money, the Dutch East India Company (VOC) issued its shares to the general
public in March 1602, marking the first modern initial public offering (IPO). In history, it was the
first business to provide bonds and stock to the general public. Prior to the Securities and
Exchange Board of India (SEBI) being established as the regulatory body, Reliance was the first
Indian firm to go public in 1977. India began a process of economic liberalization and opened its
doors to global investment in the 1990s. There was a surge of noteworthy, historic IPOs during
this time. An optimistic period for IPO activity was marked by the spike in Indian companies
going public at the turn of the millennium.

Advantages and Disadvantages of an IPO

Advantages of IPO

2
 1. Creation of Capital
Through an IPO, a corporation can raise a sizable amount of money from the general
public to cover working capital requirements, debt payments, technical advancements, or
corporate development.

2. Greater Credibility and Visibility

A company's reputation among investors, suppliers, consumers, and financial institutions
is improved when it is listed on a stock exchange.

3. The availability of cash for investors

By enabling current investors, promoters, and staff members who have stock options to
sell their shares on the open market, it offers them an exit strategy or partial
monetization.

4. Better Corporate Management

Better openness, accountability, and financial discipline result from public firms' need to
abide with SEBI laws and make regular reports.

5. Future Capital Access

Once listed, a company's improved investor trust makes it easier for it to obtain money
later on through follow-on public offerings (FPOs) or the issuance of other securities.

6. Valuation Based on the Market

Based on investor demand, the IPO process assists in establishing a reasonable market
valuation for the business, which acts as a performance standard.

Disadvantages of IPO

1. Expensive
Underwriting fees, legal and accounting fees, registrar costs, marketing expenses, and
continuing compliance obligations are all part of the costly IPO process.

2. Diluting Control and Ownership

Depending on the proportion of equity issued to the public, promoters may lose a great
deal of control over the business.

3. The Weight of Regulation

Listed businesses are subject to stringent governance, compliance, and disclosure
requirements, which can make operations more complex and time-consuming.

4. Pressure from the Market

Due to pressures from stock market performance and investor expectations, companies
are frequently compelled to concentrate on short-term financial success.

3
 5. Risk of Valuation and Volatility
Regardless of the true business fundamentals, share prices might be overvalued or
undervalued due to market sentiment and other economic factors.

6. Risk to Reputation
A badly done initial public offering (IPO) or poor post-IPO performance can harm the
company's reputation, influence investor sentiment, and make it more difficult to raise
money in the future.

Format and types of IPOs

Depending on their target investor base, regulatory requirements, and financial objectives,
Indian companies are free to select from a variety of IPO formats. The most common kinds are
Fixed Price Issue and the Book Building Issue. The pricing strategy, transparency, and investor
reaction vary throughout models.

1. Fixed Price Issue

The most basic type of initial public offering (IPO) is a fixed price issue, in which the
corporation makes the offer price known beforehand. The offer paper makes this price
explicit, and all investors apply at the same set rate. At the time of application, the entire
amount owed for the shares must be paid. There is some degree of risk in estimating the
issue's price because the demand is unknown until the subscription closes. Small and
medium-sized businesses frequently employ this strategy since it is straightforward and
simple to implement.

Key points:
 The price is predetermined and made public.
 Payment in full is needed at the time of application.
 Demand visibility is only available after closure.

2. Book Building Issue

Here, a price range is set by the company and the underwriter for the investors to bid
within. The demand for the shares, the bids received, and the desired amount of capital will
4
 all affect the final price. The majority of businesses are allowed to choose their share price
range, with the exception of banks and infrastructure firms. The cap price may be set by the
company at a 20% premium over the floor price. Typically, books are available for bidders to
amend their offers for three days. Because book-building facilitates greater price discovery,
issuers frequently favor it. The Cut-off Price is the issue's ultimate price.

Key points:

 The price range is made public for bidding.

 Market demand determines the final price.
 Encourages widespread involvement from investors.

Fresh Issue

The procedure by which a business issues new shares to the public for the first time or during a
subsequent offering is known as a "fresh issue." This issuance raises additional funds for the
business and expands the total number of shares in circulation. The money raised from a new
issue goes straight into the company's coffers and is typically used for a number of corporate
objectives, including working capital needs, debt repayment, business expansion, and research
& development. Participants in a new issue add to the company's growth capital and become
new equity investors. This technique is essential for follow-on public offerings (FPOs) and initial
public offerings (IPOs), giving businesses access to more funding.

Offer for Sale (OFS)

Offer for Sale (OFS) is a distinct process where existing shareholders, such as promoters,
venture capitalists, or the government, sell their shares to the public. Unlike a fresh issue, the
company does not create new shares nor receives any proceeds from the sale. Instead, the
ownership of existing shares is transferred from the current shareholders to new investors. OFS
is typically used by promoters or the government to reduce their stake or comply with
regulatory norms such as minimum public shareholding. It is conducted through a transparent
bidding process, often combined with book building, and executed on the stock exchange
platform. OFS provides liquidity to existing shareholders without diluting the company’s equity.

IPO Process
A firm may go public for a number of reasons. These consist of increasing capital for growth,
releasing value for investors, and other things. The following steps are often included in the IPO
process:
5
Sr Activity Timeframe Transaction
No. days

1. Fulfil eligibility requirements laid down under Chapter Six months before filing T-180
II of the SEBI (Issue of Capital and Disclosure draft red herring
Requirements) Regulations, 2018 (SEBI ICDR prospectus (DRHP)
Regulations)

2. Obtain approval of board of directors for conversion Five-and-a-half months T-165

into a public company (in case the company is a private before filing DRHP
limited company)/in-principle approval for going
public, including that of alterations in articles of
association (AoA) and memoranda of association
(MoA), if required

3. Obtain approval of shareholders through a general Five months before filing T-150
meeting, including that of alterations in AoA and MoA, DRHP
if required

4. Appointment of Merchant Bankers (Lead Manager), Five months before filing T-150
other relevant intermediaries viz. Syndicate DRHP
Members/Bankers to the issue, Registrars, Monitoring
Agency, Collecting Bankers, Underwriters, Printers,
Advertising Agencies, Legal Counsel, Practising
Company Secretaries, etc. and Compliance Officers,
including application for in-principle approval of the
stock exchanges

5. Preparation of data room/virtual data room for Four-and-a-half months T-135

collating all the data, disclosures, publications, before filing DRHP
advertisements and other documents from various
internal and external sources

6. Starting the due diligence process, which involves Four months before T-120
collating the statutory data and disclosures required to filing DRHP
prepare the red herring prospectus/prospectus as

6
Sr Activity Timeframe Transaction
No. days

specified in the Companies Act and Schedule VI of the

SEBI ICDR Regulations containing all material
disclosures, which must be true and adequate to
enable prospective investors to make an informed
decision

7. Completion of due diligence process and issuing a Due One month before filing T-30
Diligence Certificate as per Schedule V of the SEBI ICDR DRHP
Regulations and preparation of a DRHP (for book-
building issues)/draft prospectus (for fixed-price
issues)

8. Filing of draft offer document/DRHP (for book-building Filing of DRHP T

issues) or draft prospectus (for fixed-price issues) with (transaction day)
SEBI for its perusal and observations

9. Newspaper publication/public announcement of the Within two days of filing T+2

issue DRHP

10. DRHP made available for public comments on websites For a minimum of 21 T+21
of SEBI, stock exchanges and Merchant Bankers days

11. Receipt of ‘in-principle listing’ approval from stock Within 30 days of T+30
exchanges, review by SEBI and sharing observations on receipt of necessary
DRHP (except for fast-track issues) explanations

12. Final filing of red herring prospectus/prospectus with Post-incorporation of T+55

SEBI and with the Registrar of Companies (RoC) on comments in DRHP
SEBI’s approval

13. Opening of IPO (including execution of syndicate and Duration of IPO T+60
escrow agreements), application supported by blocked

7
Sr Activity Timeframe Transaction
No. days

amount (ASBA) process (in case of book-building issues

instead of fixed-price issues), pricing and allocation of
shares after price discovery is carried out

14. Closing of IPO Duration of IPO T+63

15. Finalise allotment of shares to eligible allottees (and After closure of issue T+64
filing of return of allotment as per provisions of the
Companies Act)

16. Obtain trading and listing approval from stock After closure of issue T+66
exchanges and commence trading of the securities
(mandatory listing within three days of issue closure
date)

17. Transfer of refund to unsuccessful allottees After closure of issue T+67

Structure of IPO in India

Regulatory Framework

In India, the framework of an initial public offering (IPO) functions inside a clearly defined
regulatory framework. Under the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018, the Securities and Exchange Board of India (SEBI) is the main regulatory
agency in charge of IPO supervision. This framework is further supported by the Companies Act
of 2013, Listing Obligations and Disclosure Requirements (LODR), and the listing standards of
the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). In order to safeguard

8
investors' interests, SEBI's job is to make sure businesses adhere to open practices and make
sufficient disclosures.

Key Participants in an IPO

The IPO ecosystem in India consists of multiple stakeholders who perform specific roles to
ensure the smooth execution of the public offering:

 Issuer Company: The company offering its shares to the public.

 Lead Managers (Merchant Bankers): Registered with SEBI, they handle due diligence,
documentation, pricing, and marketing.

 Registrars to the Issue: These agencies manage share application processing, allotment,
and refunds.

 Underwriters: These entities commit to subscribe to a portion of the issue in case of

under-subscription.

 Auditors and Legal Advisors: They ensure compliance with financial and legal norms.

 Depositories and Banks: NSDL/CDSL provide dematerialization services; banks handle

the ASBA application process.

Types of Issue Structures

Fresh Issue
When a firm issues new shares, it is referred to as a fresh issue. The funds raised are typically
utilized for debt repayment, working capital needs, business expansion, and other corporate
objectives. They are recorded directly on the balance sheet of the corporation. As a result, the
company's equity base grows, and the shareholding pattern is altered.

For Sale Offer (OFS)

Current shareholders—typically promoters or early investors—sell their shares to the general

9
public in an OFS. Through this approach, the selling stockholders receive the proceeds rather
than the corporation. Usually, this approach is employed to give current investors exit choices or
to satisfy legal criteria such as minimum public shareholding.

Issue Pricing Mechanisms

Two main pricing mechanisms are used in IPOs in India:

 Fixed Price Issue: The share price is set in advance and mentioned in the offer document.
Investors know exactly how much they are paying per share at the time of application.

 Book Building Process: A price band is declared (e.g., ₹100–₹120), and investors bid
within this band. The final price is determined by demand and discovered through the
book-building process. This method is more dynamic and market-driven, and currently,
the majority of IPOs in India follow this route.

Investor Categories and Reservation Quotas

To guarantee widespread and equitable participation, SEBI requires allocations for different
investor categories:

 50% of the problem is with Qualified Institutional Buyers (QIBs).

 15% of the issue is owned by non-institutional investors (NIIs).
 35% of the issue is owned by retail individual investors (RIIs).
In certain situations, additional reservations may be made for anchor investors, staff
members, or parent company shareholders (in the event of a demerger).

Application Mechanism: ASBA

All IPO applications in India now follow the ASBA (Applications Supported by Blocked Amount)
method. Investors apply for shares through their banks, which block the bid amount in their
accounts. The funds remain with the investor until shares are allotted. If the shares are not
allotted, the blocked amount is released. This method has streamlined the application process
by eliminating the need for refunds and ensuring faster settlements.

Drafting and Approval of Prospectus

10
The creation of a Draft Red Herring Prospectus (DRHP) is an essential part of the IPO process.
The company's financials, activities, goals, risk factors, and legal issues are all described in this
document. The DRHP has been submitted to SEBI for evaluation and public feedback. Following
approval, the business issues the final Red Herring Prospectus (RHP) to the Registrar of
Companies (ROC).

Pre-IPO and Post-IPO Activities

The corporation conducts investor meetings and roadshows to raise interest prior to the IPO
debut. Following issuance, shares are credited to the applicants' demat accounts and the
allocation basis is established. The shares are listed on the stock exchange six working days after
the issue close date (T+6). Following that, the business must adhere to continuous disclosure
regulations, which include material disclosures, corporate governance standards, and quarterly
financials.

Eligibility Criteria for Companies Applying for

an IPO in India
Companies must follow certain qualifying requirements set by the Securities and Exchange
Board of India (SEBI) and the corresponding stock exchanges, the National Stock Exchange (NSE)
and the Bombay Stock Exchange (BSE), in order to launch an IPO in India. By limiting access to
the capital markets to businesses with strong corporate governance and stable financial
standing, these standards aim to protect investor interests. Depending on whether an IPO is
Mainboard or SME (Small and Medium Enterprises), different eligibility conditions apply.

Minimum Standards for a Mainboard IPO

An initial public offering of major, well-established businesses with paid-up capital of at least Rs
10 crores is known as a Main Board IPO. A main board initial public offering (IPO) is a standard
IPO that is listed and traded on the NSE/BSE stock exchange platforms.

The SEBI ICDR Regulations of 2018 outline the eligibility conditions and listing standards for
Mainboard IPOs.

11
1. SEBI IPO Qualifications
Two criteria have been established by SEBI for a company to be eligible to issue initial public
offerings (IPOs):

1. Profitability Route (Entry Norm I)

To be qualified for an IPO via this route, the company must fulfill all of the following profit-
standard requirements:
 In each of the three years prior, the company's net tangible assets must have been at least
Rs 3 crores.
 Of the above Rs 3 crores in physical assets for new offerings (not OFS), no more than
50% should be cash or cash equivalents.
 In any three of the previous five years, the company's average operational profit (before
taxes) must be at least Rs 15 crore.
 If a firm changes its name, half of its income from the previous year should come from
the business operating under the new name;
 The issue size shouldn't be more than five times the company's pre-issue net worth.

2. QIB Route (Entry Norm II)

For real, competent, and lawful businesses that can't achieve stringent profitability requirements,
SEBI created the QIB route as an alternate path. Businesses pursuing an IPO via the QIB route
must make sure that:

• IPO via the process of book-building.

• Give eligible institutional buyers at least 75% of the net offering.
• If the minimum allotment criteria is not fulfilled, the IPO subscription money will be refunded.

SEBI requirements for directors/promoters/founders/investors:

• The firm's founders, promoters, directors, and selling shareholders are not subject to
disciplinary action; additionally, the promoters, directors, founders, investors, and issuing
company shouldn't be prohibited from accessing the capital markets. The debarment period
must have passed before the company can register for an IPO. The promoters, managers,
founders, and investors must not be defaulters or associated with another business that is not
allowed access to capital markets.
• The promoters, directors, founders, and investors must not be fugitive criminals as defined by
the Fugitive Economic criminals Act of 2018; additionally, they must individually or jointly own a
minimum of 20% of the shares following the first public offering.
12
2. NSE IPO Eligibility Criteria

The NSE mandates that the offering business fulfill the following eligibility requirements in
addition to the IPO rules set forth by SEBI:

 At least one promoter ought to have worked in the same field for at least three years.

 The annual reports for the previous three fiscal years must be submitted by the issuing
business to the NSE.

 The company's net worth is positive. Companies with an issue size under Rs 500 Cr are
subject to this clause. Net Worth – as defined under SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018.

 The company's post-issue paid-up equity should exceed Rs 10 Cr.

 The market capitalization ought to exceed Rs 25 Cr.

 The application of the applicant company should not have been rejected by the
exchange in last 6 complete months.

 The business must give the Exchange a certificate attesting to the following:
o The issuer is not currently facing any legal action under the Insolvency and
Bankruptcy Law.
o The National corporation Law Tribunal (NCLT) has not filed a winding-up petition
against the corporation.

BSE IPO Requirements:

The NSE and the BSE have identical equity and market capitalization requirements. The BSE
states that the issuing company's post-issue minimum paid-up capital shall be Rs 10 Cr.
• A minimum of Rs 10 Cr should be the issue size.
• The issuing company's market capitalization must be at least Rs 25 Cr.

At each step, you must provide the necessary paperwork and information in accordance with
the BSE Main Board IPO checklists listed below.
Phases of approval include: in principle; issue opening; basis of allocation; and listing and
trading approval.

Other IPO Requirements

• Before using the BSE's name in its prospectus or offer-for-sale materials, the company should
get permission from the BSE.

13
• The issuing company shall choose one exchange as the Designated Stock Exchange and submit
an application to one or more exchanges.
• To handle dematerialization both before and after the issue, the issuer should have a contract
with a depository (CDSL and NSDL).
• Prior to submitting the offer document, the promoter's shares must to be in demat form.
• Prior to the offer document being filed, the partially paid-up shares should either be
completely paid up or forfeited.
• Prior to the start of the issuance, the issuer must deposit 1% of the issue amount with the
approved stock market.

SME IPO Requirements

SME IPO stands for small and medium-sized business (SME) initial public offering. A SME need
finance to advance its operations, just like any other business. However, SMEs typically find it
challenging to raise capital from financial institutions or carry out a standard initial public
offering (IPO) due to their lack of experience.
The NSE and the BSE have created distinct SME IPO platforms, NSE Emerge and BSE SME,
respectively, for the listing and trading of SMEs in order to provide both startups and SMEs with
an equal opportunity to raise capital from the general public.

In contrast to mainboard IPOs, SEBI simplifies IPO regulations for SME IPOs. The business
launching the SME IPO shall have no more than Rs 25 crores in post-issue paid-up capital. The
additional qualifying conditions for directors, promoters, and investors in SME IPO companies
are the same as for a standard IPO: they must not be defaulters, criminals, or excluded from the
capital markets.
SMEs must fulfill additional qualifying standards set forth by the exchanges in addition to the
aforementioned ones. Below is a detailed explanation of the requirements for SME IPO.

1. BSE SME IPO Eligibility

The BSE SME platform has established the following requirements for SMEs in order to issue
SME IPOs.

Eligibility Requirement for BSE SME IPO

Eligibility Eligibility Requirement

Net worth At least Rs 1 crore for 2 preceding full financial years

Net Tangible Assets Rs 3 crores in the last preceding financial year

14
 Eligibility Eligibility Requirement

Track record
At least 3 years
(operations)

Operating profits Positive for 2 out of 3 latest financial years.

Leverage ratio Not be more than 3:1.

 For the two previous full fiscal years, the company's net value must have been at least Rs.
1 crore. The former firm must have had the necessary net worth of Rs 1 crore for the two
previous fiscal years if the newly established company is the outcome of converting a
partnership, proprietorship, or limited liability partnership.

 In the previous fiscal year, the company's net tangible assets should have totaled Rs. 3
crores.

 The business must have operated for a minimum of three years. If not, NABARD, SIDBI,
banks (except from cooperative banks), and financial institutions should evaluate and
finance the project for which an IPO is being proposed.

 For two of the last three fiscal years, the business should have operating profit (i.e.,
earnings before interest, depreciation, and taxes); the most recent fiscal year should be
required to be profitable.

 The company should have a positive operational profit in the most recent fiscal year if the
IPO project is funded by NABARD, SIDBI, or banks (apart from cooperative banks);
additionally, the leverage ratio should not exceed 3:1. Note: There may be some
flexibility for the financing companies.

 No regulatory action or trade suspension should be taken against promoters or the

businesses they support.

 Unless they are independent directors, the company's directors and promoters shouldn't
be involved in the mandatory delisting of firms or their suspension from trade due to non-
compliance.

 None of the regulatory bodies should disqualify or debar the corporate director.

15
  The application company, promoters or promoting company(ies), or subsidiary
companies shall not have any outstanding defaults on interest and/or principal payments
to holders of debentures, bonds, or fixed deposits.

 If the company has changed its name within the prior year, 50% of the revenue from the
previous fiscal year should come from the activities that the new name denotes. A
restated and consolidated basis should be used to compute the revenue.

 The business should have a website.

 The business should support trading in Demat form and have agreements with both
CDSL and NSDL, two Indian depositories.

 In the year prior to the date of application to the BSE for listing in the SME category, the
list of promoters shouldn't have changed.

 The business must provide the BSE with a certificate attesting to the fact that it is not
currently the subject of any Board for Industrial and Financial Reconstruction (BIFR)
matters or the recipient of a winding up petition.

2. NSE SME IPO Eligibility

The following requirements are listed by the NSE Emerge platform for a company to be eligible
to issue a SME IPO:
• The business should be incorporated in India in accordance with the Companies Act
1956/2013.
• The business must have operated for a minimum of three years.
• Following the issuance, the promoters should own at least 20% of the share capital, either
individually or jointly.
• At least three years of experience in the same field is required of one of the promoters.
• For at least two of the three fiscal years, the business should have operating profit and a
positive net worth.
• The business or its promoters shouldn't be facing any ongoing Board for Industrial and
Financial Reconstruction (BIFR), insolvency, or bankruptcy proceedings.
• No significant regulatory or disciplinary action has been taken against the applicant
company by any stock exchange or regulatory body in the previous three years; the
company shouldn't have received any winding-up petitions from NCLT or the Court.

Reasons of Rejection of DRHP by SEBI:

The Draft Red Herring Prospectus for the IPO may be rejected by SEBI if:

16
 • The identity of the company's ultimate promoters is unknown.
• The company is raising money for a purpose that neither SEBI nor the DRHP clearly
states.
• The issuer's business model is overly complicated, misleading, or exaggerated, and
investors are unable to assess the risks involved, making it challenging to forecast the
risks facing the company going forward.
• The company is involved in a lawsuit, the outcome of which will determine the
company's future existence;
• There was an unanticipated spike in business before the draft offer paper was filed, and
the answers to the requests for clarification regarding this abrupt increase in business are
insufficient.

Legal Structure and Compliance Norms for

IPOs in India
SEBI Act, 1992
The Securities and Exchange Board of India Act, 1992 (SEBI Act) is the cornerstone legislation
governing India’s financial markets. It established the Securities and Exchange Board of India
(SEBI) as the primary regulatory authority to protect investor interests, regulate the securities
market, and ensure its orderly development. Prior to this, India’s capital markets lacked a
structured regulatory body, leading to widespread inefficiencies and malpractice. The SEBI Act
empowered SEBI with statutory authority to regulate public issues like Initial Public Offerings
(IPOs), granting it the ability to frame rules, issue guidelines, and enforce compliance from
companies aiming to raise capital. This includes regulating underwriting, pricing, allocation
procedures, post-listing obligations, and the formulation of the Draft Red Herring Prospectus
(DRHP).

To operationalize these powers, SEBI introduced the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018 (ICDR Regulations), which outline the procedural and
disclosure norms for IPOs. These regulations ensure that companies provide full, accurate, and
timely information to the public, while maintaining ethical conduct throughout the listing
process. SEBI also supervises market intermediaries such as merchant bankers, registrars,
brokers, and underwriters, and holds them accountable for any irregularities. The Act grants
SEBI the authority to investigate, impose penalties, issue show-cause notices, and halt IPOs in
cases of non-compliance or fraudulent activity. In essence, the SEBI Act of 1992 serves as the
legal foundation for IPO regulation in India, fostering transparency, curbing malpractice, and
enhancing investor confidence in capital markets.

17
SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018 (ICDR
Regulations)
In order to modernize and fortify the regulatory framework controlling the issue of securities,
the Securities and Exchange Board of India (SEBI), which serves as the principal regulator of the
capital market, introduced the SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2018 (ICDR Regulations). The 2009 regulations were superseded by the ICDR Regulations, which
went into effect on September 11, 2018. Initial Public Offerings (IPOs), Further Public Offerings
(FPOs), Rights Issues, Preferential Allotments, Qualified Institutional Placements (QIPs), and
SME listings are all governed by these rules. By clarifying eligibility, disclosures, price, allocation,
and post-issue procedures, the 2018 regulations improve market discipline, investor protection,
and transparency. Each chapter of the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018 focuses on a distinct facet of capital issuance and disclosure standards.

Chapter I: Preliminary – This chapter provides definitions for important words and describes
the ICDR Regulations' scope. Important terms like "issuer," "SME exchange," "book building,"
"fast track issue," and "anchor investor" are introduced. In order to serve startups and cutting-
edge IT companies, SEBI announced the addition of the "Innovators Growth Platform" on June
27, 2019, and permitted the private pre-filing of draft offer documents for these listings.

Chapter II: Conditions for Public Issues – The operational and financial qualifying requirements
for issuing public issues are described in this chapter. By requiring that at least 75% of the net
offer go to Qualified Institutional Buyers (QIBs), SEBI modified these rules on March 6, 2023,
enabling issuers without a history of profitability to raise capital through initial public offerings
(IPOs). Additionally, it changed the criteria for calculating net worth and average operating
profit to provide for exceptions for specific high-growth businesses.

Chapter III: Disclosures in Offer Document – Mandatory disclosures in Red Herring Prospectus
(RHP) and Draft Red Herring Prospectus (DRHP) are covered in this chapter. This provision was
modified by SEBI on July 14, 2023, to require ESG disclosures for the top 150 listed businesses
based on market capitalization. The disclosures cover governance, assurance measures, risks
and opportunities, sustainability strategy, and KPIs.

Chapter IV: Pricing and Allotment – The pricing mechanisms (fixed price and book building) and
the specific steps for price band announcements and allocation are outlined in this chapter. For
initial public offerings (IPOs) opening on or after December 1, 2020, SEBI modified anchor
investor lock-in durations on October 9, 2020, splitting the lock-in into two parts: 50% for 30

18
days and the remaining 50% for 90 days. In order to more explicitly account for convertible
instruments, it also revised the price discovery procedures.

Chapter V: Preferential Issue – By changing the pricing mechanism from the two-week or six-
month VWAP (Volume Weighted Average Price) to a tougher 90-day VWAP for regularly traded
shares, SEBI made a significant change to this chapter on June 23, 2021. Additionally, it
increased openness by requiring issuers choosing non-cash payment to submit a valuation
report from a registered valuer.

Chapter VI: Qualified Institutional Placement (QIP) – Capital raising from institutional investors
is made easier by this chapter. By lowering the minimum interval between two QIP releases
from six months to two weeks on January 15, 2021, SEBI streamlined the QIP structure. The goal
of this modification was to assist businesses in effectively accessing markets when conditions
were favorable.

Chapter VII: Rights Issue – On May 6, 2020, SEBI proposed changes to streamline processes
during the pandemic. In order to digitize and speed up the process, it reduced the minimum
subscription level from 90% to 75%, permitted the use of ASBA for rights entitlements, and
made electronic communication for letters of offer and other papers possible.

Chapter VIII: Bonus Issue – This chapter reiterates that bonus shares must originate from free
reserves or securities premium accounts, despite the fact that there were no significant
adjustments made. Additionally, businesses need to be sure that bonus issuance is permitted by
their articles of association.

Chapter IX: SME Issuance and Listing – SEBI published a circular amending the requirements for
SME listings on November 14, 2022. It decreased the minimum post-issue capital requirement
and eliminated the need for merchant banker underwriting. The changes were intended to
boost involvement and make it easier for smaller businesses to enter the market.

Chapter X: Fast Track Issue – Qualified listed firms can raise capital without SEBI's prior approval
thanks to fast-track issuance laws. By lowering the average market capitalization requirement of
public shareholding from ₹1,000 crore to ₹500 crore and shortening the compliance record
period from three years to one year, SEBI loosened the eligibility requirements on February 23,
2021.

Chapter XI: Post-Issue Obligations – SEBI required issuers to submit monitoring agency reports
in a specified improved format on July 5, 2022. Additionally, it required independent directors to
examine the deployment of funds and the lead manager to keep a closer eye on the use of issue
proceeds.

19
Chapter XII: Miscellaneous Provisions – In the benefit of investors or market growth, SEBI has
the option to loosen regulations. In order to provide uniformity across legal frameworks, the
chapter additionally codifies conformity with the Companies Act of 2013 and FEMA standards.

SEBI (Listing Obligations and Disclosure

Requirements) Regulations, 2015, LODR
On September 2, 2015, notice was given of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015, also referred to as the LODR Regulations. On December 1,
2015, the regulations went into force. In order to simplify and harmonize the listing procedures
for various securities and stock exchanges in India, SEBI introduced these laws. Listed firms that
have listed their equity shares, perpetual debt instruments, non-convertible redeemable
preference shares, non-convertible debt securities, or specific hybrid instruments on reputable
Indian stock exchanges are subject to the LODR framework. Following listing, LODR compliance
becomes essential for businesses seeking an IPO; failure to comply may result in fines,
suspension, or delisting.

The Principles of Corporate Governance, including fair treatment of shareholders, minority

investor rights, prompt and accurate disclosures, and board accountability, are outlined in
Regulation 4. Regulations 30 to 33 of the regulations mandate both periodic and event-based
reporting. Regulation 31 deals with shareholding patterns, Regulation 33 requires quarterly
financial results to be submitted in a prescribed format with limited review reports or audit
reports attached, and Regulation 30 requires the disclosure of material events, such as
acquisitions, mergers, or debt repayment defaults, within 24 hours.

Corporate governance requirements for listed entities, such as the composition of the board
(minimum 50% non-executive directors, at least one woman director, and one-third
independent directors), the structure of the audit committee, the nomination and
compensation committees, and the duties of independent directors, must be adhered to by
companies after their initial public offering (IPO). In order to safeguard the interests of investors,
these rules make sure that publicly traded corporations adhere to strict governance procedures.
Additionally, Regulation 46 requires businesses to keep a working website with current statutory
data, including financial statements, policies, and codes of behavior.

Without sacrificing investor protection, the LODR offers particular exemptions and relaxations
under Chapter IX for businesses listed on SME exchanges, such as fewer compliance filings and
laxer governance standards. In order to bring India's disclosure structure into compliance with
international ESG standards, amendments issued on May 5, 2021, created Regulation 20A,
which mandates that the top 1000 listed businesses release their Business Responsibility and

20
Sustainability Report (BRSR) starting in FY 2022–2023. In order to improve transparency in
agreements involving third parties and listed firms (Regulation 30) and to fortify disclosure
timelines, SEBI further modified the regulations on January 10, 2023.

Together with the ICDR Regulations, the Companies Act of 2013, and stock exchange bye-laws,
the LODR Regulations form the fundamental compliance framework that regulates a company's
actions after listing. In addition to protecting investor rights, these rules guarantee consistency
and responsibility in company disclosures, which eventually boosts investor trust in the Indian
capital markets.

Securities Contracts (Regulation) Act, 1956

(SCRA)
In India, stock exchange operations and securities transactions are governed by the Securities
Contracts (Regulation) Act, 1956 (SCRA), which aims to regulate securities trading and prevent
undesirable activities. Under Section 3, any stock exchange must obtain recognition from the
Central Government to operate legally, while Sections 4 and 5 restrict public trading to
securities listed on such recognized exchanges. This makes listing a mandatory requirement for
companies aiming to raise funds through an Initial Public Offering (IPO). Section 13 prohibits all
securities contracts except spot delivery or those executed through authorized stock exchanges,
thereby ensuring that equity allotment and post-listing trading occur in a controlled
environment. Section 16 empowers the Central Government to suspend or reconstitute the
governing board of a recognized stock exchange in cases of mismanagement, adding a layer of
oversight to market infrastructure.

The Act defines and regulates key terms such as "securities," "spot delivery contracts," "options
in securities," and "stock exchanges." It also restricts forward trading and options in securities
unless explicitly permitted by SEBI, thereby preventing speculative manipulation during primary
issues like IPOs. Compliance with the SCRA’s listing norms is enforced through the listing
agreement of stock exchanges, requiring IPO-bound companies to meet disclosure standards,
maintain minimum public shareholding, and follow SEBI regulations. Sections 21 to 23 outline
penalties for non-compliance, including suspension or delisting for violations. The SCRA works in
conjunction with the SEBI Act, 1992 and SEBI’s ICDR Regulations to create a legally robust
framework that ensures transparency, protects investors, and facilitates compliant public
offerings and secondary market trades.

21
The Companies Act, 2013
The Companies Act, 2013, enacted by the Ministry of Corporate Affairs (MCA), provides the
legal foundation for company formation, capital structuring, and securities issuance in India. For
companies planning an IPO, Chapter III (Prospectus and Allotment of Securities) is particularly
important. Section 23 outlines the three permissible methods for issuing securities: rights issue,
private placement, and public offer via a prospectus. Section 26 mandates comprehensive
disclosures in the prospectus, including audited financial statements, business operations, risk
factors, management credentials, and the objectives of the issue, aligning with SEBI’s disclosure
requirements. Section 32 permits the issuance of a shelf prospectus by certain entities, allowing
multiple offerings under a single approved document. Sections 34 and 35 impose civil and
criminal liabilities on directors, promoters, and experts for false statements or omissions in the
prospectus, thereby ensuring accurate disclosures and investor protection. Section 39 sets
minimum subscription thresholds and outlines refund timelines for under-subscribed issues,
while Section 40 mandates that IPO proceeds be routed through scheduled banks and listed on
recognized stock exchanges to ensure traceability.

Section 42 regulates private placements by capping the number of eligible investors and
requiring procedural compliance such as filing PAS-3 and PAS-4. The Companies (Amendment)
Acts of 2017 and 2019 strengthened these rules with stricter disclosure and dematerialization
requirements. The Companies (Prospectus and Allotment of Securities) Rules, 2014, further
detail procedural mandates, including Rule 13 which mandates dematerialization for public
issues and Rule 4 which defines shelf prospectus eligibility. Section 62 of Chapter IV governs
rights issues, while Section 63 regulates bonus issues, specifying eligible reserve sources.
Sections 149 to 172 provide corporate governance norms, including requirements for
independent directors, audit committees, and internal financial controls. Collectively, these
provisions ensure that companies aiming to raise capital through IPOs maintain legal
compliance, transparency, and strong governance, working in tandem with SEBI’s regulatory
framework to uphold market integrity.

22
Objectives of the study
1. To assess the effectiveness of various IPO pricing strategies in the Indian market by
evaluating different valuation models and pricing strategies used during the IPO process.
2. To explore the patterns and preferences of retail investors in India when participating in
IPOs, focusing on their investment behavior, decision-making approach, and level of
engagement.
3. To examine the complete IPO process in India, with a focus on the procedures followed,
regulatory requirements, key participants, pricing methods, and investor response.
4. To analyze the evolution of the IPO market in India by examining historical patterns,
investment trends, frequency of public offerings, and prospects for future growth.

Need for Study

With the rapid expansion of the Indian IPO market, there is a growing need to understand how
different pricing strategies and valuation models influence investor response and post-listing
outcomes. As retail participation in IPOs continues to rise, gaining insights into their investment
behavior, preferences, and decision-making processes becomes increasingly important. At the
same time, the IPO process itself, including regulatory requirements, procedural steps, and the
role of key stakeholders, remains complex and often under-explored. Analyzing these
dimensions is essential to identify gaps, improve transparency, and enhance market efficiency.
Furthermore, studying the historical evolution and emerging trends in IPO activity can help
forecast future growth and inform policy decisions, making this research highly relevant for
companies, investors, and regulators alike.

Research Methodology
The research methodology adopted for this study is both descriptive and exploratory in nature.
A descriptive approach is used to study the IPO market in India, focusing on trends over the last
five years, the structure of the IPO process, pricing strategies, issue performance, and regulatory
developments. This helps in presenting a clear picture of how the IPO market functions, how it
has evolved over time, and what patterns are visible in terms of volume, valuation, and
frequency of public issues. In contrast, an exploratory approach is applied to examine the
preferences, investment behavior, and engagement levels of retail investors in IPOs, aiming to
uncover patterns and motivations that are not readily observable through secondary data alone.

The study is based on both secondary and primary data. Secondary data has been collected
from SEBI publications, company prospectuses, annual reports, stock exchange filings, and
23
financial market databases to support the descriptive analysis. For the primary data collection
related to retail investor behavior, a survey was conducted over a period of one month. The
sampling technique used for this was snowball sampling, where a few known respondents were
initially contacted and additional respondents were reached through their referrals. This
approach was useful in targeting individuals with firsthand experience in IPO investments,
especially retail investors who may not be accessible through traditional sampling methods.

Growth of India’s IPO Market (2020–2025)

In FY 2020, only sixteen main-board IPOs were launched in India, raising approximately ₹26,600
crore. The COVID-19 pandemic and economic uncertainty heavily suppressed market activity
during this period. The following year, FY 2021, witnessed a dramatic recovery. A total of 63
IPOs were issued, raising ₹118,704 crore—nearly five times the previous year’s total. This
resurgence was supported by high-profile listings such as Zomato, Paytm, Policybazaar, and
Nykaa, which drew investor interest and marked a shift towards technology-oriented public
offerings.

FY 2022 saw the number of IPOs decrease to 52, while total fundraising remained strong at
₹111,000 crore. The standout issue was the Life Insurance Corporation of India (LIC), which
alone raised ₹21,000 crore. The market appeared to favor larger, well-established companies
during this phase of cautious investor behavior and refined valuation sensitivity.

In FY 2023, 57 IPOs were launched, raising ₹49,434 crore. Although the capital raised declined
compared to previous years, the emphasis was on issuer quality and governance standards.
Investors showed a preference for companies exhibiting strong fundamentals and stable
financial performance. Regulatory measures implemented by SEBI to bolster disclosure and due
diligence contributed to this shift.

The fiscal year 2024 experienced renewed momentum. Ninety-one main-board companies went
public, cumulatively raising ₹160,000 crore. This represented a 220 percent increase in capital
raised compared to FY 2023. The month of October 2024 alone generated ₹38,700 crore
through new listings. Large-cap IPOs from Hyundai Motor India and Swiggy contributed
significantly to this capital flow. During the same year, India accounted for approximately thirty
percent of the total global IPO volume.

In the first half of FY 2025, there was a notable slowdown, with only ten IPOs raising ₹18,704
crore. Despite the reduced number of offerings, the average IPO size nearly doubled, increasing
from ₹905 crore to ₹1,870 crore. This suggests that the market is now favoring fewer but larger

24
and better-structured issues, with strong interest from institutional investors. Prominent listings
during this period included Ather Energy and Hexaware Technologies.

Small and medium-sized enterprises (SMEs) played a growing role during this period. In FY 2024,
238 SME IPOs raised ₹8,700 crore, effectively doubling the amount raised by SMEs compared to
the previous year. Retail investor participation also increased, as evidenced by the growth in
demat accounts from 49 million in 2020 to around 153 million by late 2024. Retail subscription
ratios for main-board IPOs reached an average of thirty times in FY 2024, significantly up from
seven times in FY 2023.

IPO listings in FY 2024 generated average first-day gains of 29 percent, compared to twelve
percent in FY 2023 and twenty-five percent in FY 2022. Approximately sixty-four percent of
companies saw positive returns on their listing day. Exceptional performers included Vibhor
Steel, which saw a 193 percent listing gain, and Tata Technologies, which recorded a gain of 163
percent.

In mid-2024, SEBI introduced thirty-one mandatory pre-IPO disclosure requirements. This

initiative streamlined the approval process, reducing the timeline from 126 days in 2022 to
under 90 days. SEBI also facilitated greater market participation through the introduction of UPI-
based IPO applications and the launch of the Innovators Growth Platform for start-ups.

Top 10 Indian IPOs (2021–2025)

Issue
Listing Total Issue Price Listing Listing
Company Name Amount
Date Subscription (₹ Cr) Price (₹ Cr) Gain (%)
(₹ Cr)
Hyundai Motor India 22-Oct-24 27,870 2.37× 1,960 1,934 -1.33%
LIC (Life Insurance
17-May-22 21,008 2.95× 949 867.2 -8.62%
Corp)
Paytm (One97
18-Nov-21 18,300 1.89× 2,150 1,950 -9.30%
Communications)
SBI Cards & Payment
16-Mar-20 10,340 3.91× 755 661 -12.45%
Services
Zomato 23-Jul-21 9,375 38.25× 76 116 52.63%
Nykaa (FSN E-
10-Nov-21 5,352 81.78× 1,125 2,018 79.38%
Commerce)
Adani Wilmar 8-Feb-22 3,600 17.37× 230 265 15.22%

Tata Technologies 30-Nov-23 3,042 69.43× 500 1,200 140.00%

MapmyIndia (CE Info 21-Dec-21 1,039 154.71× 1,033 1,581 53.09%

25
 Systems)
IdeaForge Technology 7-Jul-23 567 106× 672 1,305 94.20%
Source: Compiled from data provided by NSE India, BSE India, Moneycontrol, Chittorgarh IPO
Tracker, and official IPO Red Herring Prospectuses (2020–2025).

Literature Review
IPO Pricing Mechanisms and Book-Building in India

Studies on IPO pricing strategies in India highlight the evolution of institutional structures such
as book-building and anchor investor commitments. (Agarwalla et al., 2013) document that
reforms in the late 1990s improved price discovery by introducing transparent valuation bands
and reliance on institutional demand. Their analysis of IPOs from 1999 to 2008 indicates that
anchoring and price bands limited extreme over-subscription and contributed to calmer listing
activity. Another line of research focuses on high growth firms and their pricing strategies. (Soni
& Praveen, 2021) examine IPOs such as Zomato and Nykaa and note that pricing based on
future earnings expectations led to listing volatility, suggesting that excessive optimism can
disrupt supply and demand alignment. (Ghosh et al., 2024) advance this field through predictive
modeling. By integrating grey market pricing with macroeconomic indicators and differentiating
institutional from retail demand they show that up to sixty two percent of listing performance
can be anticipated before market debut. This implies that non-financial variables substantially
shape IPO pricing.

Retail Investor Participation Patterns

Retail investors have become a significant force in India’s IPO market, attracting close scholarly
attention. In a qualitative study of SME IPOs, (Srivastava et al., 2022) find that brand familiarity,
perceived stability, and social influence often outweigh detailed financial analysis in purchase
decisions. This suggests that emotional and peer-related factors guide retail choices. (Veluvali,
2019) analyzes broader retail behavior and finds that although retail investors contribute to
subscription success, they tend to sell their shares early and miss long term gains. She
recommends stronger risk disclosure norms to support retail outcomes. The influence of social
media is also noted by (Vamossy, 2023) who correlates social media activity with higher
subscription rates. Issues with greater online buzz show significant first day gains but
underperform over six months compared to less publicized IPOs, indicating that hype impacts
short run outcomes.

Regulatory Influences on IPO Quality

26
The regulatory environment continues to adapt, influencing IPO practices and issuer
accountability. (Agarwalla et al., 2013) attribute improved discipline and greater market trust to
SEBI requirements including anchor quota and price bands. These measures reduced pricing
extremities and reinforced investor safeguards. (Srivastava et al., 2022) discuss newer
compliance demands for SME and startup offerings. Although these regulatory changes
improved transparency, they also increased entry costs and may discourage some issuers.
(Ghosh et al., 2024) find that electronic bidding and automated disclosures improve data
accuracy and reduce procedural burdens, helping regulators without compromising oversight.
(Soni & Praveen, 2021) advocate ongoing post-issue monitoring of high growth companies that
rely heavily on projected earnings. They suggest that milestone reporting and clawback
provisions may improve market stability.

Structural Growth and Market Fundamentals

The structural evolution of the IPO market is also well documented. (Agarwalla et al., 2013) find
that reforms such as dematerialization of securities and greater foreign investor access have
reduced extreme listing volatility and improved long run performance. (Veluvali, 2019) reports
that retail and institutional investors tend to perform alike in mid-sized issues, which highlights
the need for stronger corporate disclosures and investor education. (Vamossy, 2023) adds that
online sentiment can amplify volatility and recommends curbing pre-issue promotion to protect
investors and ensure price integrity. Taken together these studies show that structural changes
and market regulations are crucial to protect all stakeholders and to support sustainable market
development.

Pricing Models Within Macro and Market Contexts

Recent research highlights the importance of macroeconomic variables in IPO pricing models.
(Ghosh et al., 2024) demonstrate that variables such as GDP growth, inflation, and foreign fund
flows explain forty-five percent of listing variability, even when standard firm-based indicators
are controlled. This suggests that pricing models should incorporate broader economic context.
(Soni & Praveen, 2021) reinforce this point by showing that IPOs priced aggressively in rising
rate environments are more likely to suffer sharp price corrections. They warn against relying
solely on projected earnings without considering external market pressures.

27
IPO Valuation Methods
Valuing a company before it goes public is a critical step in the IPO process. It involves
estimating the company's worth to determine a fair price at which its shares should be offered
to investors. Several methods are used for IPO valuation in India, depending on the company’s
financials, industry, and future prospects.

1. Discounted Cash Flow (DCF) Method

The Discounted Cash Flow method estimates a firm's fair value by projecting its future free cash
flows and converting them to present value using a discount rate, typically the Weighted
Average Cost of Capital (WACC) (Steiger, 2010). In IPO contexts, this approach is frequently used
to derive an intrinsic valuation that captures both the company’s current performance and its
long-term growth potential. In India, DCF is particularly useful for firms with stable and
predictable cash flow structures such as manufacturing companies, infrastructure firms, and
utilities.

The process begins with financial projections based on revenue, cost structure, working capital,
and capital expenditure. These cash flows are forecasted for a period typically ranging between
five to ten years. The WACC is then applied to discount these projected cash flows. In Indian
IPOs, analysts often include a terminal value beyond the explicit forecast period using either a
perpetuity growth model or a market-based multiple approach. This terminal value often
constitutes a significant portion of the overall firm value, which highlights the importance of
carefully choosing the growth assumptions and discount rate.

The DCF method provides a logical structure and is widely accepted among investors, yet it is
highly sensitive to the assumptions made. Small changes in revenue growth or discount rates
can lead to significant differences in valuation. This is why analysts are advised to carry out
scenario analysis or use sensitivity analysis to test different assumptions. In Indian IPOs, DCF is
often supported with valuation reports included in the Draft Red Herring Prospectus. Adjusted
Present Value (APV), which separately values tax shields and base business cash flows, is
sometimes used when the firm’s capital structure is expected to change post-listing. Despite its
limitations, DCF remains one of the most rigorous valuation methods, particularly when the goal
is to understand intrinsic value from a long-term investor’s perspective.

2. Relative Valuation (Multiples) Method

Relative valuation is among the most commonly used methods in IPO pricing, especially in the
Indian context. This approach involves comparing the financial ratios of the IPO-bound company
with those of similar listed companies to determine a fair valuation range. The most commonly

28
used multiples include Price to Earnings (P/E), Price to Book (P/B), Enterprise Value to EBITDA
(EV/EBITDA), and EV to Sales (Alford, 1992; Chang and Tang, 2007). In India, analysts and
underwriters rely heavily on this method due to its alignment with prevailing market conditions
and ease of communication to investors.

The process involves identifying a peer group of companies that operate in the same sector and
have similar size and risk profiles. Analysts gather their trading multiples from stock exchange
data and financial statements. The average or median of these multiples is applied to the IPO
candidate's financial metrics such as earnings or book value to derive an implied valuation
range. For example, if the average EV/EBITDA multiple for the peer group is eight, and the IPO
firm’s projected EBITDA is Rs. 100 crores, its enterprise value could be estimated at Rs. 800
crores.

While relative valuation is simple to apply and reflects current market sentiment, it has
limitations. One of the main challenges lies in selecting truly comparable companies.
Differences in capital structure, accounting policies, growth outlook, and governance can distort
results. Moreover, in bullish markets, peer multiples may be inflated, leading to aggressive
pricing. In the Indian market, regulators like SEBI have imposed price band mechanisms and
anchor investor rules to ensure that market-based valuations remain within a justified range.
Overall, relative valuation is not a standalone method but is often used alongside intrinsic
valuation models to triangulate a reasonable IPO price.

3. Net Asset Value (NAV) and Comparable Transaction Method

The Net Asset Value method focuses on valuing a company based on the net worth of its assets,
calculated by subtracting total liabilities from the total asset value. This approach is particularly
useful for asset-heavy companies such as real estate developers, infrastructure operators, and
investment firms. In India, NAV is sometimes mandated or recommended when tangible assets
form the core of a business's value proposition. Asset valuations are typically adjusted to market
value rather than relying on historical cost, especially when those assets are likely to appreciate
or are income-generating.

The methodology involves detailed scrutiny of the balance sheet, followed by fair value
adjustments. For example, real estate properties might be independently appraised to reflect
their current market price rather than book value. Liabilities including debt and contingent
obligations are subtracted to arrive at net asset value. The final equity value is then divided by
the number of outstanding shares to determine a per-share valuation.

The Comparable Transaction method complements NAV by using data from similar past
transactions in the industry. These transactions include mergers, acquisitions, or previous IPOs

29
where valuation multiples are publicly available. For instance, if a recent transaction valued a
logistics firm at ten times EBITDA, a similar multiple might be used as a benchmark for pricing a
new IPO in the same sector.

While both methods provide grounded and data-driven valuation, they are not suitable for all
companies. NAV may underrepresent firms with significant intangible assets such as technology,
brand equity, or future growth potential. Comparable transactions require access to transparent
and recent deal data, which is not always available or reliable in the Indian context. Despite
these challenges, these methods are widely used as supporting benchmarks, especially for
validating valuations derived from DCF or multiples in IPO settings.

4. Residual Income and Dividend Discount Models

The Residual Income model is an alternative to traditional cash flow methods and is particularly
effective when cash flows are volatile but accounting profits are stable. It calculates the value of
a company by adding the present value of future residual income to the current book value of
equity. Residual income is defined as net income minus an equity charge, which represents the
required return on equity capital (How et al., 2007). This method works well in situations where
firms have limited or unpredictable cash flows, yet demonstrate strong earnings on paper.

In practical terms, the model begins by projecting net income and computing an equity charge
based on the cost of equity. The residual income is then discounted over a forecast period, and
the total is added to the current book value to estimate the intrinsic value of the firm. It is
particularly useful for Indian firms in capital-intensive sectors or during periods of restructuring,
where cash flows may not yet align with accounting profits.

The Dividend Discount Model values a company based on the present value of future expected
dividends. It is best suited for firms with stable dividend payout policies, such as financial
institutions or mature utilities. In this model, dividends are projected over a future period and
discounted using the cost of equity. If dividend growth is assumed to be constant, the Gordon
Growth Model variant of DDM is typically applied. In India, however, most IPO-bound firms
retain earnings for expansion and do not pay dividends in the initial years post-listing.

Both models are less frequently used in the current IPO landscape, particularly because newer,
high-growth Indian companies focus on reinvestment rather than payouts. Nevertheless, these
valuation tools remain valuable for cross-checking other models, especially in mature or
dividend-paying sectors. Their strength lies in offering alternative perspectives based on
profitability and payout behavior, rather than only free cash flows or market comparables.

30
Statistical – more data in excel graph and interpretation

31