IPOs and underwriting
How a company sells shares to the public for the first time, and the promise that keeps the issue from failing
Rules and process in force on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room what has to happen between a company deciding to 'go public' and its shares trading on screen. Most people picture only listing day. This deck walks the whole path, and explains the safety net called underwriting.
An IPO is a company's first share sale to the public. Underwriting is an optional pledge to buy unsold shares.
The company raises money. If underwritten, the underwriter buys any shares left unsold, up to the agreed amount, so funds still reach the company.
Trainer notes
IPO stands for 'initial public offering'. Keep the two ideas separate: the IPO is the sale; underwriting is the backstop behind it. Both are explained in this deck.
Four words to know first
Primary market
Where a company raises new money by selling shares, as in an IPO. Afterwards they trade on the secondary market.
Merchant banker
The bank that runs the issue: prepares documents, files them with SEBI and markets the offer. Also the lead manager.
Underwriter
A party that agrees to buy any shares the public leaves unsold, up to an agreed amount. It earns a fee for the risk.
Prospectus
The offer document: the business, the risks and the terms. The draft (DRHP) goes to SEBI for review first.
Take-away: The merchant banker runs the issue; the underwriter stands behind it; the prospectus describes the offer.
Trainer notes
DRHP is the 'draft red herring prospectus'; the near-final version filed before the issue opens is the red herring prospectus (RHP). Do not get drawn into the Latin; the point is that SEBI reviews the draft.
Underwriting, with real arithmetic
THE SET-UP
A company offers 1 crore new shares at ₹100 each, to raise ₹100 crore.
A merchant banker underwrites the whole issue. These figures are invented.
- The public applies for only 85 lakh shares. 15 lakh shares are left unsold, a 15% shortfall.
- Because the issue is fully underwritten, those 15 lakh unsold shares 'devolve' on the underwriter.
- The underwriter must buy them at the issue price: 15 lakh × ₹100 = ₹15 crore.
- The company still receives its full ₹100 crore. The underwriter now holds 15 lakh shares and keeps its fee.
Result: Underwriting insures against a shortfall: company money is protected; the underwriter bears the risk.
Illustration with invented, round figures. Not a forecast and not a view on any issue.
Trainer notes
The shares the underwriter takes up are called 'devolvement'. A fresh issue must receive at least 90% of the offer (Regulation 45), or all money is refunded. Underwriting is optional, and it protects the issue only if the underwriters honour it.
How an IPO works, step by step
This is the path for a book-built main-board issue today.
Draft filed with SEBI
The merchant banker files the draft prospectus (DRHP). SEBI reviews it and issues observations before the issue can open.
Price band and bidding
The issuer sets a price band. Investors bid within it over the open days. Anchor investors may be allotted one day before the issue opens.
Apply through ASBA
Investors apply with money blocked in their own bank account (ASBA). Individuals applying via a broker or other intermediary use UPI up to ₹5 lakh.
Allotment and listing
Shares are allotted, blocked money is released for non-allottees, and the shares list and begin trading within three working days (T+3).
Sources: SEBI ICDR Regulations, 2018; SEBI circular of 5 Apr 2022 (UPI up to ₹5 lakh); SEBI circular of 9 Aug 2023 (T+3 listing).
Trainer notes
'T' is the day the issue closes; T+3 counts three working days from there. A fixed-price issue has no price band, but main-board issues are usually book-built. SME issues follow a separate, lighter framework.
Who the shares are offered to
A book-built issue by a company that meets SEBI's eligibility route is divided like this.
| Category | Share of net offer | Who they are |
|---|---|---|
| Qualified Institutional Buyers | Not more than 50% | Banks, insurers, mutual funds and other large institutions. Up to 60% of this part can go to anchor investors. |
| Non-Institutional Investors | Not less than 15% | Individuals and others applying for more than ₹2 lakh. |
| Retail Individual Investors | Not less than 35% | People applying for up to ₹2 lakh. Each gets a minimum lot if shares allow; else a draw. |
Source: SEBI ICDR Regulations, 2018, Regulation 32(1) (allocation; eligibility route in Regulation 6(1)).
Trainer notes
A company that does not meet the eligibility route must offer at least 75% to QIBs under Regulation 6(2). Half of each anchor investor's shares are locked in for 90 days and the rest for 30 days, since 1 Apr 2022.
The IPO process today, in numbers
Current process parameters. These are SEBI rules, not market prices.
- UPI LIMIT
- ₹5LVia brokers, individuals use UPI up to ₹5 lakh (issues from 1 May 2022).
- LISTING TIMELINE
- T+3Listing within three working days of close, mandatory since 1 Dec 2023.
- APPLICATION ROUTE
- ASBANon-anchor bids use blocked bank funds (ASBA), mandatory since 1 Jan 2016.
- MINIMUM SUBSCRIPTION
- 90%A fresh issue needs at least 90% subscribed, or all money is refunded.
Sources: SEBI circular of 5 Apr 2022 (UPI); 9 Aug 2023 (T+3); 10 Nov 2015 (ASBA for all, from 1 Jan 2016); ICDR Regulations, 2018, Reg 45 (minimum subscription).
Trainer notes
These are regulatory parameters, so they are the latest in force, not lagged market data. The 90% test is in Regulation 45; refunds are due within four days of closure.
If you learnt this from older material
What older decks say
- You post a cheque with your application, and it is banked when you apply.
- Shares list about a week (T+6) after the issue closes.
- Everyone applies the same way, through a paper bank form.
What holds now
- You apply through ASBA; the money stays in your account, only blocked, since 1 Jan 2016.
- Shares list on T+3, three working days after close, mandatory since 1 Dec 2023.
- Individuals applying via brokers use UPI for amounts up to ₹5 lakh, since 1 May 2022.
Take-away: The idea of underwriting has not changed. How you apply, and how fast shares list, have.
Sources: SEBI circulars of 10 Nov 2015 (ASBA), 5 Apr 2022 (UPI) and 9 Aug 2023 (T+3).
Trainer notes
Older training material was written before ASBA was made compulsory for all investors (2016), before UPI applications (2018, limit raised to ₹5 lakh in 2022) and before the T+3 listing timeline (2023).
Four things people get wrong
Misconception'If I apply, I will get shares.'
What is trueWhen an issue is heavily oversubscribed, retail shares may go by draw of lots. Many applicants get nothing; applying does not guarantee allotment.
Misconception'Apply for more and get more.'
What is trueRetail applicants get one minimum lot if shares allow; leftovers go pro rata. If lots run short, a draw decides, so applying more may add nothing.
Misconception'The point of an IPO is the listing pop.'
What is trueAn IPO raises money for the company. The listing price can be above or below the issue price; nothing about it is assured.
Misconception'The underwriter sets the price.'
What is trueThe issuer and merchant banker set the price band. The underwriter's job is to buy an unsold shortfall, not to price the issue.
Trainer notes
On the listing price: we explain that it is not assured and we do not predict it. On allotment: the registrar runs a computerised lottery for an oversubscribed retail category, supervised by the exchange.
Four questions to ask about any IPO
Who raises the money?
Is it fresh capital for the company, or existing holders selling their stake (an offer for sale)? Only fresh capital reaches the company.
What does the prospectus say?
The offer document sets out the business, how the money will be used, and the risk factors. Read the risk factors, not only the headline.
What is the price band?
The band and the basis for it are in the offer document. The final price is fixed within the band after bidding.
What am I applying for?
The lot size, the amount that will be blocked, and the fact that an allotment is not guaranteed if the issue is oversubscribed.
Take-away: We explain the process and the documents. We do not tell a client whether to apply to any issue.
Trainer notes
This is the slide to rehearse. When a client asks 'should I apply for this IPO?', the answer is to walk them through these four questions and the offer document, not to give a view.
Check yourself
Question 1: A fully underwritten issue of 1 crore shares at ₹100 draws applications for 90 lakh shares. What happens to the other 10 lakh?
Answer: They devolve on the underwriter, who must buy them at ₹100 (10 lakh × ₹100 = ₹10 crore). The issue is fully subscribed and the company receives its money.Question 2: An individual wants to apply for ₹3 lakh of an IPO through a broker. Which payment route is used, and what happens to the money until allotment?
Answer: UPI (used for amounts up to ₹5 lakh via a broker), under ASBA. The money stays in their own bank account, only blocked, until shares are allotted or the block is released.Question 3: How many working days after an issue closes must the shares list, and since when has that been compulsory?
Answer: Within three working days (T+3). It has been mandatory for public issues opening on or after 1 December 2023.
Sources and disclaimer
Sources for the figures in this explainer
- T+3 listing (optional from 1 Sep 2023, mandatory for issues opening on or after 1 Dec 2023): SEBI circular SEBI/HO/CFD/TPD1/CIR/P/2023/140, 9 Aug 2023.
- Retail UPI application limit of ₹5 lakh, from 1 May 2022: SEBI circular SEBI/HO/CFD/DIL2/CIR/P/2022/45, 5 Apr 2022.
- ASBA compulsory for all investors for issues opening on or after 1 Jan 2016: SEBI circular CIR/CFD/POLICYCELL/11/2015, 10 Nov 2015.
- Allocation (QIB not more than 50%, NII not less than 15%, retail not less than 35%): SEBI ICDR Regulations, 2018, Regulation 32(1); minimum subscription of 90%: Regulation 45.
- Anchor investor lock-in (50% for 90 days, 50% for 30 days) for issues opening on or after 1 Apr 2022: SEBI (ICDR) (Amendment) Regulations, 2022.
- All company names, share counts and prices in the worked example are invented for illustration and refer to no real issue.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).