🏦 Why companies sell shares: IPOs, SME listings and dilution

🎯 In 30 seconds: A company sells shares to raise money it cannot or does not want to borrow. The first sale to the public is an IPO (initial public offer). In India it runs through a SEBI-reviewed offer document, a price band, a few days of bidding with your money blocked in your bank account through UPI, and listing on NSE and BSE three working days after the issue closes. Part of an IPO is often existing owners selling, not the company raising money. And every time a company issues new shares later, your slice of the business gets smaller unless you buy more.

Why a business needs outside money

Hypothetical Sharma Foods Ltd started as one dosa outlet in Pune. Twenty years later it sells packaged batter in eleven states and wants a ₹300 crore factory. Where does that money come from?

• Profits it keeps. The cheapest money, but slow. Sharma Foods earns maybe ₹40 crore a year after tax.
• A bank loan. Fast, but the interest is due every month whether sales are good or bad, and banks want collateral.
• Private investors. Angel investors, venture capital or private equity funds buy shares directly. They usually want a big stake and a way to sell it later.
• Selling shares to the public. An IPO raises a large amount, gives early investors a way to cash out, and lets the company raise more later through the market. The price is disclosure: from now on, results every quarter and public scrutiny of every big decision.

Shares are the only one of these that never has to be paid back. That is why a company gives up part of its ownership for them.

Primary market vs secondary market

Two different markets are involved, and mixing them up causes a lot of confusion.

• Primary market: the company (or its existing owners) sells shares to investors for the first time. In a fresh issue, the money goes to the company. This is the IPO itself.
• Secondary market: after listing, investors trade those shares with each other on NSE and BSE. The company gets nothing from these trades. When you buy 10 shares of a listed company tomorrow, your money goes to another investor, not to the company.

How a mainboard IPO works, step by step

1. Bankers are hired. The company appoints merchant bankers, called book running lead managers, to prepare the issue, check the facts and market it to investors.
2. The DRHP is filed. The draft red herring prospectus is a long document covering the business, its finances, risks, legal cases, the promoters and what the money will be used for. For a mainboard issue it is filed with SEBI and put on the websites of SEBI, the exchanges and the bankers so the public can comment.
3. SEBI reviews it. SEBI sends observations and the company updates the document. SEBI's review is about disclosure. It is not a judgement that the shares are a good buy.
4. The RHP is filed. The red herring prospectus has everything except the final price and exact number of shares. It is filed with the Registrar of Companies before the issue opens.
5. The price band is announced. At least two working days before an IPO opens, the company announces a floor price and a cap price. Under SEBI's rules the gap between floor and cap is limited to 20%.
6. Bidding opens. For a few working days, investors bid for shares in lots, at a price inside the band. Your money is not taken yet. It is blocked in your bank account.
7. Price and allotment. After bidding closes, the final price is fixed from the demand (book building). The registrar works out who gets how many shares.
8. Listing. The shares are credited to demat accounts and start trading on NSE and BSE.

Your money is blocked, not sent

In an Indian IPO you do not transfer money to the company. You apply through ASBA (Application Supported by Blocked Amount): the bid amount is blocked in your own bank account and only debited if you get shares. Through a broker's app, the block is done with a UPI mandate that you approve with your UPI PIN.

Individuals can use UPI for IPO applications up to ₹5 lakh. Retail individual investors are those applying for up to ₹2 lakh. An individual applying for more than ₹2 lakh and up to ₹5 lakh still uses UPI but falls in the non-institutional category (as of SEBI's May 2025 FAQ).

Since December 2023, every public issue must list within three working days of closing, called T+3, where T is the day bidding closes. SEBI's indicative timeline looks like this:

If your money stays blocked after it should have been released, the issuer and the bank have to compensate you, counted from T+3. Complain to your bank first, then through the routes in Who runs and polices the market.

Who gets the shares

An IPO is split into investor categories with fixed shares of the offer. For a company that meets SEBI's profitability tests and uses book building, the split is:

A company that does not meet the profitability tests can still list, but at least 75% of the offer must go to QIBs, and retail can get no more than 10%. If you see a 10% retail quota, that tells you the company used this route.

Anchor investors are large institutions that commit a day before the issue opens. Up to 60% of the QIB portion can go to them. Their commitment is meant to signal confidence, so their shares are locked: half for 30 days after allotment and half for 90 days. Within the anchor book, SEBI reserves a part for domestic mutual funds, insurers and pension funds (widened by an amendment notified in October 2025).

When retail is oversubscribed, each successful retail applicant gets at least one minimum lot, and the lots are decided by a draw. So a popular IPO that is subscribed 50 times in the retail category means most applicants get nothing, however many lots they applied for. Retail investors can also tick "cut-off", meaning they accept whatever final price is fixed inside the band.

Fresh issue vs offer for sale

An IPO can have two parts, and the offer document separates them.

• Fresh issue: the company creates new shares and sells them. The money goes to the company for the purposes listed under "Objects of the issue".
• Offer for sale (OFS): existing shareholders (promoters, early investors, private equity funds) sell some of their shares. The money goes to them. The company gets nothing.

Say Sharma Foods raises ₹1,000 crore: ₹300 crore fresh issue and ₹700 crore OFS. Only ₹300 crore builds the factory. The other ₹700 crore is early investors taking money off the table. That is legal and common, but it is worth knowing who is selling and why.

The promoters cannot sell everything and walk away. SEBI requires them to keep at least 20% of the post-issue capital locked in for 18 months (three years if most of the fresh money is for capital spending), and the rest of their pre-issue holding is locked for six months. When lock-ins expire, more shares can come onto the market, which sometimes weighs on the price.

Mainboard vs SME platforms

Smaller companies can list on separate SME platforms: NSE Emerge and BSE SME. The rules are lighter, and the draft offer document is filed with the exchange rather than reviewed by SEBI. The risks are higher, so SEBI tightened the rules in 2025:

• The minimum application is two lots, which for SME IPOs opening from 1 July 2025 means an application above ₹2 lakh. The idea is to keep very small investors out of a risky segment.
• The offer for sale is capped at 20% of the issue size, and each selling shareholder can sell only part of their holding.

The grey market premium is not a real price

Before listing, you will see a "GMP" quoted on websites and in Telegram groups: an unofficial price at which people claim to be trading IPO shares or applications before they list. There is no exchange, no regulator and no settlement guarantee behind it. Nobody can tell you who set the number. Treat it as rumour, not data, and never pay anyone for an "allotment" outside the official process.

Share count: the number that changes your slice

Your ownership is your shares divided by the total number of shares. The total can change after the IPO:

• QIP (qualified institutions placement): a listed company sells new shares quickly to institutions only.
• Preferential allotment: new shares or warrants issued to chosen investors, often promoters or a strategic partner, at a price set by SEBI's formula.
• Rights issue: new shares offered to existing shareholders in proportion to what they hold, usually at a discount. If you do not take up your rights, your slice shrinks.
• ESOPs: employee stock options turn into new shares when employees exercise them. A steady trickle every year.
• Conversion of warrants or convertible bonds into shares.

A bonus issue or a stock split also increases the share count, but every shareholder gets more shares in the same proportion, so nobody's slice changes. More in Dividends, bonus issues, splits and buybacks.

A worked dilution example

Sharma Foods has 10 crore shares after its IPO. You own 1,000. The company earns ₹100 crore a year.

The company sold 2.5 crore new shares in a QIP. Your slice fell by a fifth and EPS fell from ₹10 to ₹8. Whether that is bad depends on what the company does with the money. If the new factory lifts profit to ₹150 crore, EPS becomes ₹12 and you are better off. If the money is wasted, you simply own less of the same business. That is why EPS growth, not just profit growth, is what matters to a shareholder.

What this means for you

• Check the share count trend. A company whose share count rises every year is spending your ownership. One whose share count is flat or falling is not.
• Read the objects of the issue. Debt repayment, a factory, "general corporate purposes" and an OFS mean very different things.
• Listing day is noisy. Prices on the first day often swing far from the issue price. A pre-open call auction sets the first price (see Market hours and settlement), and allottees who wanted a quick gain sell into it.
• No IPO is "safe". Plenty of Indian IPOs have traded below their issue price for years after listing.

Try it

1. On the SEBI website, open the list of draft offer documents filed and pick one recent DRHP.
2. Find these four things and write them down: the fresh issue amount, the offer for sale amount, the objects of the issue, and the promoter holding before and after the issue.
3. Read the "Risk factors" section and list the three risks you think matter most.
4. When an IPO is open, look at the exchange's issue page. Note the price band, lot size, the minimum application in rupees and which category quotas apply.

You do not need to apply. Reading two or three of these documents teaches you more about how Indian businesses are put together than any tip ever will.

Sources

• SEBI: FAQs on Issue of Capital and Disclosure Requirements (May 2025)
• SEBI: Master Circular for the ICDR Regulations (updated 9 February 2026), including the T+3 listing timeline
• SEBI: Review of certain aspects of public issue framework (anchor investor lock-in)
• SEBI: Review of SME framework under the ICDR Regulations (board memorandum)
• NSE: FAQs on e-IPO (SME individual investor category from July 2025)
• Business Standard: SEBI expands IPO anchor book reservation (November 2025)