What is an IPO?
IPO is the initialism of an Initial Public Offering. A company that is looking to go big by offering its stocks to the public should register for an IPO. In simple terms, by IPO registration, a company can make its stocks available to the public for investment. With more public investment, a company can raise equity capital. Once the company is IPO registered, they can sell the company stocks in the open market, and the company will be known as the “issuer.” Companies can repay the capital to public investors with help from investment banks.
Who is eligible for an IPO?
Any company, small, big, young, or old, is eligible for an IPO. In other words, anyone who wants to sell their stocks in the open market can register for an IPO. However, companies must meet the Securities and Exchange Commission (SEC) requirements to hold an IPO. Once IPO registration is accomplished, the existing shareholders can sell their shares to the investors.
A fundamental reason for IPO registration is to raise capital. Additionally, becoming an IPO paves an exit way for the company’s initial investors like friends and family. This transition period of a company from private to public is essential to realize the entire profit from their private investment. With the company becoming public, you can witness a boost in the company’s sales and earnings as the name and prestige among the general public incline. Although, there are certain things to take into consideration, such as the cost of becoming an IPO and the time it takes to become an IPO. The price depends on how big the company is, and any company takes about six months to 1 year to become an IPO.
Cost of an IPO
The cost of becoming an IPO depends on numerous factors, such as the complexity of the IPO structure, company size, offering proceeds, and a company’s readiness to operate as a public company. The highest direct cost for a company would be towards the underwriting fee, and a considerable expense would be towards the legal, accounting, and tax costs. These expenses are directly proportional to the company’s complexity while becoming an IPO. In addition to these, most companies find it necessary to hire a team of IPO consultants who can assist with filing the registration statement and produce an independent assessment of IPO readiness and similar activities.
After becoming an IPO, the company’s main expenses would be the cost of marketing, printing, and distribution. However, IPO registration online and e-IPOs can majorly reduce these costs. Electronic Initial Public Offers enable investors to bid on their shares through the internet.
IPO is a common way to go public, and there are two types of IPOs; Fixed price offering and Book Building offering. There is a set amount at which the shares are presented to the investors in a fixed price offering, whereas in a book building offering, there is no fixed amount, but there is a price range.
Fixed price offering:
The company evaluates the price of the shares to be offered along with underwriters. These prices can be set after assessing the company’s assets, liabilities, and all financial aspects. To take part in fixed price offerings, investors will have to pay the total share price while applying. Usually, the fixed price is lower than the market price, and hence, investors will always be interested in fixed price offerings.
Book building offering:
Book building offering has been prevalent worldwide since a long time ago but is a relatively new concept in India. Unlike Fixed price offering, Book building offering has cap price and floor price, which are the highest and the lowest price for the price band, respectively. The price band is often a 20% range.
A company can register to become an IPO through IPO registration online. The detailed steps are mentioned below.
STEP 1: The first thing to do while launching an IPO is to hire an investment bank. An investment bank could be a merchant banker, underwriter, and lead manager. In basic definition, an investment bank is a particular segment of banking that helps companies raise their capital and provide consultancy services. They serve as intermediaries between companies and their investors. The investment banks analyze the companies’ financial status, explain the stock offerings, etc.
STEP 2: The next step of the process is to register for IPO with the necessary documents. The company needs to furnish an IPO Draft Prospectus (DRHP) which consists of details like the company particulars, promoters, IPO details, and risks. These documents are submitted to the Securities And Exchange Board Of India (SEBI).
STEP 3: The company now has to submit an application to one of the 17 active stock exchanges in India. The biggest and most popular stock exchanges of India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). However, to list their stocks on NSE, there are a few requirements that are to be met by the company.
STEP 4: Once the official work is over, then begins the marketing of the upcoming IPO. Immediately after submitting the prospectus documents to SEBI, a company is eligible to promote its IPO. Such a promotion is known as ‘Road Show.’ Marketing agencies make the advertising of the IPO more viable.
STEP 5: Next comes the most crucial part of the IPO process; deciding the price of a share. This decision is reached upon based on one of the two ways to price a share: Fixed price offering, and Book Building offering. After the share offering is priced, the company submits an IPO Red Herring Prospectus (RHP), a more detailed version of a DRHP. The RHP, also known as the IPO Final Prospectus, consists of all the information about the issuer company and the proposed IPO. Since an RHP is a vital source of information, it is provided to all the investors, thus considered an essential record and is mandatory according to the Companies Act.
After an expensive and time-consuming process, the IPO will be available to the public to apply for shares on the date mentioned in the final prospectus. The IPO will be live for application for 3-6 days.