Short answer: Companies go public mainly to raise large amounts of fresh capital that are hard to obtain from private investors or banks. An initial public offering, or IPO, is the process by which a private company first offers its shares to the public and lists them for trading, and it can also let early backers sell part of their stake.
Last reviewed: 12 November 2026
At a glance
| Term or step | What it means |
|---|---|
| Fresh capital | Money the company raises by issuing new shares. It does not have to be repaid. |
| Merchant banker | Checks the company’s documents and financials through due diligence and helps prepare the offer documents. |
| Roadshow | Company executives present the company to investors and build interest before the offer opens. |
| Book-building | The method most IPOs in India use to set the issue price. |
| Fixed-price method | The other option for setting the issue price. |
| Selling existing stake | Founders, early investors and employees can sell some or all of their shares and realise their investment. |
Why do companies raise money through an IPO?
A growing company often needs more money than its founders, private investors or lenders can comfortably provide. An IPO opens the door to a much wider pool of buyers, so the amounts raised can be far larger. The money goes to the company itself when it issues new shares, which is called fresh capital.
Fresh capital differs from borrowing. A bank loan or a bond is debt, and it must be repaid with interest. Equity raised through an IPO does not have to be repaid, and it avoids the interest payments that debt would require. The trade-off is that the new shareholders become owners and share in the company’s future profits.
Who benefits when a company goes public?
An IPO can also let existing owners cash out. Early investors, founders and employees can sell some or all of their stake, which is how they realise the value they have built up. Money from these sales goes to the sellers, not to the company.
This is a catch worth understanding. A founder who sells shares in an IPO receives cash but owns a smaller share of the company afterwards. Whether that suits the company’s owners is a judgment they must make for themselves, and this article does not assess it.
How does a company prepare for an IPO?
The company first appoints a merchant banker, a financial intermediary that manages the offer. The merchant banker checks the company’s documents and financials through due diligence, which means verifying the information before it reaches the public. The merchant banker also helps prepare the offer documents that describe the company and the shares on offer.
Preparation is slow and involves many checks. Any gap found during due diligence can delay the offer or change its terms. Investors rely on these documents, so errors in them can cause problems later.
What happens during the roadshow?
Before the IPO opens, company executives hold a roadshow. This is a series of presentations in which they explain the business to potential investors and build interest in the offer. Roadshows are a sales exercise as well as an information exercise, so executives’ descriptions of the company should be read alongside the offer documents.
How is the issue price set?
The issue price is the price at which shares are offered to the public. Most IPOs in India use the book-building process, in which investors state the prices and quantities they are willing to bid for, and the final price is set from those bids. The other option is the fixed-price method, in which the price is set in advance.
Each method has a different trade-off. Book-building lets demand inform the price, but the final figure depends on how much interest investors show. A fixed price is known from the start, but it does not respond to demand in the same way.
A hypothetical example
The figures below are invented for illustration only and do not describe any real company.
Suppose a company called Example Foods has 4 crore shares held by its founders and early investors. It issues 1 crore new shares at ₹200 each.
- Fresh capital raised by the company: 1 crore × ₹200 = ₹200 crore
- Total shares after the IPO: 4 crore + 1 crore = 5 crore
- Share held by new public shareholders: 1 crore ÷ 5 crore = 20 per cent
- Share held by the earlier owners: 80 per cent
Now suppose a founder sells 50 lakh of her existing shares in the same offer at ₹200 each.
- Money received by the founder: 50 lakh × ₹200 = ₹100 crore
- Money received by the company from this sale: nil
The example shows that the company gets the new money, while the founder gets cash for her own shares. Both steps dilute the founder’s percentage ownership, though only the new issue adds money to the company.
Frequently asked questions
Does the money raised in an IPO have to be repaid?
No. Equity raised through an IPO does not have to be repaid, unlike debt, and it avoids the interest payments that debt would require.
What does a merchant banker do?
A merchant banker checks the company’s documents and financials through due diligence and helps prepare the offer documents. The company appoints the merchant banker before the IPO.
What is the difference between book-building and the fixed-price method?
Both are ways of setting the issue price. Most IPOs in India use book-building, while the fixed-price method is the other option.
Who can sell their shares in an IPO?
Early investors, founders and employees can sell some or all of their stake. This lets them realise their investment in the company.
Sources and last check
Facts in this article were checked against the sources below on 12 November 2026. Rules and figures can change; check the primary source before acting.
- upstox.com (broker education)
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- zerodha.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.