An IPO is a route through which a private company can raise funds and in the process become a public company. While several large Indian companies like Paytm or Ola Cabs are privately held, many aspire to be publicly listed. A public listing helps in raising funds and also unlocks value for existing shareholders. Many IPOs get noticed only after a bumper listing, but the process starts several months ago. The life cycle of an IPO is extensive and lengthy.
Once the management of a company decides to take it public, it has to hire an investment banker or multiple investment bankers. The investment banker manages the entire process and acts as the underwriter for the issue. The company also has to hire a set of lawyers to ensure all legal requirements are met.
– Registration statement: The first official step to kickstart an IPO is to submit a registration statement to the Securities and Exchange Board of India. It gives an idea about the financial health of the company along with its business plans. The markets regulator thoroughly scrutinizes the detailed financial records of the company.
– Draft prospectus: While SEBI conducts its own background checks on the company’s finances, the company can start preparing the draft red herring prospectus with the help of the investment bankers. The DRHP is a detailed document with the financial performance, business plans, location of offices and plants and the expected price range of the IPO. The document is meant for potential investors.
– Roadshow: Just launching an IPO may not be enough to garner investor interest. Top management personnel along with investment bankers embark on ‘roadshows’ across the country. They mostly visit major commercial centres and try to attract high net worth individuals and corporates. The prospective investors are informed about the company’s plans and growth potential. The roadshows are an opportunity for underwriters the company management to gauge the investor sentiment for the IPO.
– SEBIapproval: Once the market regulator is satisfied with the information provided in the registration statement, it gives its approval to the public issue. Sometimes, SEBI suggests certain amendments to the DRHP. Only after incorporating the amendments can a company release the draft prospectus to the public. At this stage, the company decides the stock exchange it would get listed on.
– Deciding the price band: The company provides a tentative price band in the DRHP, but after getting SEBI approval, the final price band is announced. In the case of fixed price IPOs, the price of the issue is announced by the company. On the other hand, in the book building method, the company discovers the price at a later stage. The company announced the price band and the investors are invited to bid for the company’s shares in multiples of lots. The upper limit of the price band is known as the ceiling price, while the lower limit is called the floor price. The issue price or the cut-off price in the book building method is decided by the weighted average of all the bids. The company and the underwriters also finalise the size of the IPO along with the price band.
– Bidding: After the size of the issue and the price band is decided, the dates of the issue are decided. On the announced dates, investors can place their bids for the shares of the company.
– Share allotment: As soon as the issue closes, the investment bankers analyse all the bids and decide the cut-off price. The cut off price depends on the demand for the IPO. The shares are allotted to investors in the proportion of their bids as most of the times IPOs are oversubscribed.
– Listing: A few days after the closure of the bids, the shares of the company list on the stock exchanges. The shares are credited into the demat account of the investors who get the allotment. Others get their money back.
Even though an IPO has an extensive process, most of the requirements are for the company and the underwriters. Investors should read the prospectus thoroughly and place the bids carefully. Applying for IPOSs has become extremely easy and can be done through mobile apps and websites.