Important IPO terms all investors should understand before investing

IPO investing has become hugely popular among Indian investors, especially in the last few years. With so many companies rushing to go public, everyone wants to join the IPO wave and try their luck at making a quick buck. But the moment you start reading about an IPO, it can get overwhelming with so many jargons thrown at you - QIBs, ASBAs, BRLMs, RHP… and suddenly it all feels too much.  

The good news? We've got you covered.
 

We’ve put together a list of all the key IPO terms you should know before hitting that Apply button.Understanding these terms will help you analyse the IPO – whether it makes a god investment. Each term is explained in simple words; consider it as your IPO cheat sheet.
 

Without further ado, here is a list of key IPO terms. 

Abridged Prospectus 

Definition: 

An abridged prospectus is a SEBI-specified memorandum that contains the key highlights and significant information from the full prospectus, presented in a concise and investor-friendly format.

Whenever a company launches an IPO, it must submit a detailed prospectus to SEBI that explains everything about the business — what it does, how it makes money, its risks, financial history, management, and the purpose of raising funds. However, this full prospectus can be extremely long and technical, making it hard for everyday investors to quickly understand the key points.
 

That’s why SEBI requires companies to provide an abridged prospectus — a concise yet comprehensive, easy-to-read version of prospectus that highlights only the most important information. Think of it as the “executive summary” of the full prospectus. It gives you the essential facts you need before applying for the IPO without overwhelming you. 

Draft red herring prospectus (DRHP)

Definition: 

The DRHP is a preliminary IPO document submitted to SEBI containing detailed information about the company and the IPO. It is reviewed by SEBI, and any required changes must be incorporated before moving to the final prospectus.

Before a company can launch an IPO, SEBI must first review and approve its disclosures. That process begins with the company submitting a Draft Red Herring Prospectus, or DRHP. This document gives SEBI — and the public — a complete view of the company: its business model, financial performance, risks, promoters, and future plans.

Because this is a draft, SEBI examines it carefully, suggests changes, and asks for clarifications wherever needed. Only after these corrections are made does the company move closer to launching the IPO. This document contains all the final details of the IPO, except the price or the number of shares that are being offered in the IPO. 

Red herring prospectus, or RHP

Definition: 

The RHP is the final IPO prospectus (before pricing is finalized) that contains the price band, issue size, dates, business details, and necessary disclosures for investors.

Once SEBI approves the draft and all required changes are made, the company files its final version — the Red Herring Prospectus. Unlike the draft, the RHP includes crucial IPO details such as the price band, the number of shares being offered, the opening and closing dates, and other updated disclosures.

This is the document investors rely on when deciding whether to apply for the IPO. 
You can think of the RHP as the official "ready-to-launch" prospectus. 

New issue

Definition: 

A new issue refers to newly created shares offered by the company in an IPO, with the funds raised being used for business purposes such as expansion, working capital, or debt repayment.

New Issue: Many companies come out with an IPO to raise fresh capital for growth — expanding capacity, reducing debt, or funding new projects. When the company creates new shares and sells them to the public for this purpose, it is called a new issue.

In this case, the money collected from investors goes directly to the company. 
 

Offer for sale (OFS)

Definition: 

OFS is a mechanism where existing shareholders sell their shares in an IPO. The proceeds go to the selling shareholders, not to the company.

Sometimes existing shareholders — such as the promoters, founders, or private equity investors — want to sell part of their holdings during the IPO. This is known as an Offer for Sale, or OFS.

In an OFS, no new shares are created. Instead, part of the existing ownership is simply transferred from old investors to new public investors. 


OFS vs. New Issue

The basic rule is that OFS = old investors cashing out, and new issue = new money. 

Book running lead manager, or BRLM

Definition: 

A BRLM is a SEBI-registered investment banker responsible for managing the IPO, including regulatory coordination, pricing, marketing, and smooth execution of the issue.  

An IPO is a complicated process involving valuation, regulatory approvals, marketing, and pricing. To handle all of this, companies hire professional investment bankers called Book Running Lead Managers (BRLMs).

They work closely with the company, conduct investor roadshows, coordinate with SEBI, manage the bidding process, and help determine the final issue price. 

ASBA (Applications blocked amount supported)

Definition: 

ASBA is a facility where the IPO application amount is blocked in the investor’s bank account and debited only upon allotment, ensuring secure and efficient processing.  

When you apply for an IPO, your money is not immediately deducted. Instead, your bank locks — or “blocks” — the required amount in your account. You continue earning interest on it. 
If you receive an allotment, the bank deducts the funds; if not, the block is removed automatically.

This process ensures safe, transparent, and seamless IPO applications. 

The allotment basis

Definition: 

Basis of Allotment refers to the SEBI-regulated process that determines how shares are distributed among investors when demand exceeds supply.

IPO oversubscription is common — many people apply, but the number of shares is limited. To ensure fairness, SEBI has a structured method to decide who gets shares. This mechanism is known as the basis of allotment.

It explains why investors may not always receive shares even when they apply. 

 Lot size

You cannot apply for a single share in an IPO. Companies define a fixed group of shares called a lot, such as 20, 50, or 100 shares. Investors must apply for at least one lot, and always in multiples of that lot. 

Issue of fixed price vs. Book-Built 

Investor types: Retail, HNI, and QIB

Investors are grouped as follows: 

• QIBs: Large organizations such as banks and mutual funds.
• High-net-worth individuals who apply with larger sums are known as HNIs or NIIs.
• Retail: Up to ₹2 lakhs can be applied for by regular investors.

Every IPO has a set quota for each category.

You can see past the hype if you understand IPO jargon. You can make better decisions about pricing and bid timing if you understand what phrases like "book-built" and "cut-off" mean. Remember, IPO investing is not just about “listing gains”; it’s about long-term participation in quality businesses. 
 

Concluding remarks
 

Investing in stock markets through IPO allows investors to get into a company early on and benefit from its growth. However, not all IPOs make good investment. Its important to analyse each company individually through the DRHP and RHP to understand its business, financials, IPO objectives and other key details Spend some time learning about what's actually going on behind the scenes before you jump in. Equipped with these terms, you can confidently read an IPO prospectus and make investment decisions.

Additionally, ArihantPlus makes investing simple when you're ready. With just one app, you can track allotments in real time, place an early bid, and invest with ease by using the Pre-Apply feature.