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Key Takeaways
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An IPO enables companies to raise capital for various purposes like growth or debt repayments.
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The process involves having underwriters, regulatory approvals (like SEBI), prospectus filing, pricing
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The public issue opens for retail, institutional, and high-net-worth investors.
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Success depends on objectives: companies aim for smooth fundraising and brand enhancement, while investors seek listing gains or long-term value appreciation.
Companies typically go public to raise a huge amount of capital in exchange for securities. Once a private company is convinced about the need to become a public company, it kick-starts the IPO process. Companies that want to go public follow a process that adheres to the rules of exchanges.
What is the IPO Process?
Before investing in an IPO, investors must understand what the IPO process involves. In simple terms, an IPO is an Initial Public Offering through which a company offers shares to the public to raise funds for expansion, launch new projects, or repay loans while also offering liquidity to existing shareholders.
Any company launching an IPO has to follow the procedure laid down by the Securities and Exchange Board of India (SEBI). The issuing company partners with an investment bank that provides guidance throughout the process, such as studying the company's financials, determining the price band, submitting applications to SEBI & the Registrar of Companies (ROC), obtaining approval, and selecting the stock exchange where the shares are to be listed.
After successful completion of this process, the issues are opened to the public, high net worth individuals, institutional investors, & mutual funds for a stipulated time period. On completion of the process, the shares are allotted to the investors. In case of oversubscription, the shares are allotted in the ratio decided on the basis of oversubscription. These shares can now be traded on the stock exchanges where they are listed.
Learn Why do Companies go Public here.
Understanding The Need For the IPO Process
Understanding the need for an IPO process requires recognising the multiple benefits it offers to both companies and investors. Here is a list of key benefits offered by initial public offerings.
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Raising capital: Companies primarily opt for an IPO to raise funds. The funds raised through an IPO can provide the necessary resources for a company to fuel its growth plans and take advantage of new opportunities.
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Enhance brand visibility: IPO listing brings credibility to the brand and paves the way for companies to attract new capital for investing. Additionally, it brings wider recognition to the company and helps it attract top talent and strategic alliances.
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Liquidity for existing shareholders: IPO typically offers existing shareholders an opportunity to liquidate their stakes. Private company shares have limited liquidity and can’t be bought or sold easily. When the stocks get listed, shareholders can trade their stocks easily and exit their investments.
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Establishing market value: The IPO involves raising rounds of funds from the market, for which the company needs to determine its market value. The IPO process includes determining the size and price of IPO shares based on market demand and investor appetite.
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Access to the capital market: IPO gives a company access to the broader capital market, where it can tap into a wider range of financial options. It can issue additional shares, bonds, debt instruments, or access other forms of capital to fuel future growth.
One should note that the entire IPO process is regulated by the Securities and Exchange Board of India (SEBI). This is to check the likelihood of a scam and protect investor interest. To complete the process of converting a private company into a successful public company, it will need a team of external expert advisors like auditors, lawyers, underwriters and accountants to deal with the unique challenges which come their way.
Also, check out Types of Financial Instruments here.
Process of IPO
Step 1: Hire an investment bank
A company seeks guidance from a team of underwriters or investment banks to start the process of an IPO. More often than not, they take services from more than one bank. The team will study the company’s current financial situation, work with its assets and liabilities, and then plan to cater to the financial needs. An underwriting agreement will be signed, which will have all the details of the deal, the amount that will be raised, and the securities that will be issued. Though the underwriters assure that the capital will be raised, they will not shoulder all the risks involved in the money movement.
Step 2: Prepare RHP and register with the SEBI
The Company and the underwriters, together, file the registration statement (mandatorily under the Companies Act) along with the Draft RHP (Red Herring Prospectus) which comprises of all the financial data, industry and business description, management details, probable price estimate per share, risk reports, business plans of the company and other disclosures as per the SEBI Act and Companies Act. It will have to declare how the Company is going to utilise the funds it will raise from the IPO, and the securities which it will issue for public investment. These documents must be submitted to the local ROC (Registrar of Companies) before the offer is opened to the public for bidding. Then the company can make an application for the IPO to SEBI. The initial prospectus is called so because the first page of the prospectus contains a warning which states that this is not a final prospectus. However, all the obligations that the company’s prospectus will have should also be contained in the RHP. Any variations between the two will have to be highlighted and duly approved by SEBI and ROC.
If the registration statement is compliant with the stringent guidelines set by the SEBI, which ensures that the company has disclosed every detail a potential investor should know, then it gets a green signal. Or else it is sent back with comments. The company should then work on the comments and file for registration again. Only after the SEBI approves the application can the company set the date for the IPO. Thereafter, the financial prospectus is released. This phase also tests the waters for the IPO among the potential investors.
Learn How to Apply for an IPO here.
Step 3: Application to Stock Exchange
The Company should decide on the stock exchange where it is going to list its shares and apply there.
Step 4: Go on a Roadshow
Before the IPO goes public, this phase happens over an action-packed two weeks. The executives of the company travel around the country marketing the upcoming IPO to potential investors, mostly QIBs in important financial centres. The agenda of the marketing includes the presentation of facts and figures, which will drum up the most positive interest. At this stage of the IPO, the company may also give an opportunity to the bigger organisations to buy stocks of the company at a price set before the stock goes public.
Step 5: IPO is Priced
Based on whether the Company wants to float a Fixed Price IPO or Book Building Issue, the price or price band is fixed.
Fixed price method – The underwriter and company work together to fix a price for their shares. The account of the liabilities, the target capital to be achieved, and the demands of stocks and every other related detail to come up with a price.
Book-building method – Here, the underwriter and the company set a price band within which investors can bid. The final price is dependent on the demand for the shares, the bids received, and the target capital to be achieved. Except for infrastructure companies and banks, most companies are free to set their share price band. The Company is allowed to set the cap price at 20% higher than the floor price. Books are normally open for 3 days during which bidders can revise their bids. Issuers often prefer book-building as it allows better price discovery. The final price of the issue is called the Cut-off Price.
Step 6: Available to the Public
On a planned date, the application forms will be made available to the public, who can obtain them from any designated bank or broker. Once they fill in the details, they can submit them with a cheque or online, as well. SEBI has fixed the period of availability of an IPO to the public, which is usually 3 working days, but cannot exceed 10 days.
When should the IPO reach the public? s It's a tricky decision. Because picking the right time to offer shares is imperative to maximise the earnings from the sale. Some companies have their own economic timeline to go public. If the giant companies are scheduled to come into the market, smaller companies avoid their entry going public at the same time, fearing the stealing of the limelight by the giant companies.
Once the IPO bidding is closed, the company has to submit the final prospectus to both the ROC and SEBI. This should contain both the quantum of shares being allotted and the final issue price on which the sale is closed.
Step 7: Going Through with the IPO
After the IPO price is finalised, the stakeholders and underwriters work together to decide how many shares each investor will receive. Investors will usually get full securities unless they are oversubscribed. The shares are credited to their demat account. The refund is given if the shares are oversubscribed. Once the securities are allotted, the stock market will start trading the Company’s IPO. IPO shares are generally allotted to the bidders within 1 day of the end of the subscription period and have to be listed within 3 days.
If the IPO is oversubscribed, the shares are allotted proportionately to the applicants. For example, if the oversubscription is five times the allotted number of shares. Then, an application for 10 lakh shares will be allotted only 2 lakh shares. Businesses must also ensure that their internal investors do not trade, thereby manipulating the IPO's stock prices.
Also Read More About What Is IPO
Metrics for Judging a Successful IPO Process
Apart from understanding the IPO process in India, it’s also important to know how to judge a successful IPO. There are many aspects by which the success or failure of an IPO can be judged. Some aspects are tangible and some may be intangible. There are many stakeholders, and, naturally, their interests and yardsticks for measurement differ. The prime objective of the issuing company is to raise funds and brand recognition.
Meeting the forecasts mentioned in the prospectus and those of the analysts, and smooth execution, also mean a successful IPO. The investor expects a quick return on the day of listing, which is called “first day pop”, but at the same time, it may also mean that the offer price was not calculated properly, and the company could have raised more capital with a higher offer price. But at the same time, it gains the goodwill of the investor community, which helps boost its brand image and visibility, widening its customer base. In some other cases, even though the “first day pop” was not that high, the share price continues to increase gradually and steadily, giving handsome returns to the investor in the long run.
Also, check out Types of IPO here.
Conclusion
The price of the stocks may or may not increase after the IPO, as they start trading in the secondary market. There are SEBI-mandated lock-in periods that require promoters and non-promoters to hold their IPO shares for specified periods. When these periods end, there may be a momentary price slump in the stock.
Now that you understand the process of IPOs in India, check out the latest IPO reviews being released on the Angel One website.