Guide to IPO Process in India

In the previous chapter, we learned the meaning of an Initial Public Offer  (IPO)  and why companies go for an IPO. Now, let us look at the IPO process and what happens after an IPO.

Making a company public is a complex process that involves different stakeholders. Along with this, there are also strict regulations and a regulator that scrutinises every tiny detail. 

In this chapter, we will explore the sequence of events that companies undergo to make their stocks available to the public. 

Step 1: Appointment of Merchant Bankers/Underwriters

The journey kicks off with the company appointing Merchant bankers or underwriters who act as intermediaries between the company, potential investors & the regulators

Think of it this way - Just like aeroplanes require trained pilots to complete the journey, these financial institutions play a crucial role in steering the company through the twisted & difficult path to getting listed on the stock exchange 

Step 2: Registration for IPO

Once the investment bankers are on board, the company along with the bankers, prepare a registration statement and a draft prospectus, known as the Draft Red Herring Prospectus (DRHP).

This document is a vital tool for retail investors. Like a blood test report, the DRHP contains vital information about the company. 

The DRHP includes both qualitative & quantitative aspects such as risk factors, use of proceeds, industry description, business description, management details, financial information, and legal disclosures.

After preparing the DRHP, the company must submit it to the Registrar of Companies (ROC) at least three days before the offer is open to the public for bidding. 

The IPO bidding process concludes with the submission of the final prospectus to both the ROC and, finally, the Securities and Exchange Board of India (SEBI) detailing the number of shares to be made public & the company valuation. 

Step 3: Cooling-Off Period

Following the submission of the documents required, there is a cooling-off period during which SEBI scrutinises all the information provided by the company. 

SEBI looks for errors, omissions, and discrepancies. Only after SEBI approval can the company proceed to set a date for the IPO.

Step 4: Application to Stock Exchange

Once the company receives the regulator's approval, it applies with the stock exchange, where it plans to launch the IPO. 

This step is a critical precursor to making the company's shares available to the public. If everything has been smooth and transparent until this step, the company can prepare to go public.

But how do they ensure that the public is informed about their IPO? 

Step 5: Road Shows

Companies embark on grand road shows to generate excitement and interest in the IPO. 

These are not “road” shows literally but marketing events organised by their merchant bankers and underwriters, showcasing the IPO offer to investors globally. 

The roadshow lets the company's management present the potential growth trajectory and market expectations. These events are crucial for convincing investors about the company's prospects.

Step 6: Fixed Price Issue vs. Book Building Issue

After all these steps, it is finally time to decide the IPO price but How is this decided? 

Well, the IPO process diverges into two types at this point: Fixed price issue and Book building issue

In Simple terms: 

• In a fixed price issue, the price at which shares will be sold is disclosed in advance. 
• In contrast, the book-building issue allows investors to bid within a specified price range, with the final price determined after bidding. 

Issuers often prefer book building as it helps discover the price and demand, ensuring the issue generates maximum value.

But nothing in life is this simple, right? Therefore, we’ll specifically dive into these two processes in the upcoming chapters. 

Step 7: Pre-IPO Restrictions on Insiders

Before the IPO is launched, measures are implemented to prevent existing stakeholders from insider trading. This helps stabilise the market, prevent manipulation, and protect new investors from an influx of shares that could disrupt the natural progression of the market price

Step 8: Primary Market Sale

The IPO now opens to retail investors, and the actual sale of shares on the primary market occurs during this step, and companies collect money from the investors. 

The bidding period lasts for about 5-7 days, within which investors interested in the company can subscribe to the IPO

Step 9: Allotment of Shares

The IPO shares are usually allotted to bidders within 10 days of the last bidding date. 

If oversubscribed, shares are allotted proportionately, preventing any entity from gaining an unfair advantage. This is ensured through a lottery sort of process, which guarantees that the allotment is made anonymously and on random selection, which in turn, cannot be manipulated manually.

This step marks the end of the journey undertaken by the newly listed public company. 

This journey is a meticulous and lengthy process that involves regulatory compliance, strategic planning, and effective communication. 

From the appointment of merchant bankers to the final allotment of shares, each step plays a pivotal role in ensuring a successful transition from a private to a public company. 

As companies navigate this journey, they must engage in proactive marketing, adhere to regulatory guidelines, and foster investor confidence to make their IPO successful.

Now, let us quickly look at the events that happen right after a company goes public. 

What Happens After the Initial Public Offering?

Let’s dive into the post-IPO period, exploring what happens to stocks, the intricacies of the IPO closing process, and the subsequent journey of a company in the public market

Lock-in Period

Once the company is public, investors often wonder about the fate of stock prices. 

Ideally, IPOs are launched to benefit the company and In the weeks following the IPO, the hope is for the stock price to trade evenly or experience a slight decline. 

However, this is subject to market dynamics and various external factors. Therefore, any conjecture about the stock price seems futile. 

Another critical aspect to note is the lock-in period associated with IPO shares. This contractual provision prevents insiders, including promoters and employees, from selling their shares for a specific duration after the IPO closes. 

Previously, the lock-in period for promoters was three years, but regulatory changes have reduced it to 180 days. Additionally, promoter shareholding lock-in periods exceeding 20% have been shortened from one year to six months.

This is critical to understand because promoters offloading shares could cause an abnormal fluctuation in the stock prices. This can lead to a euphoric rise or a sharp correction. So, before investing in IPOs, be aware of the lock-in period. 

Share Price Volatility

After the IPO, a company's share price becomes subject to market demand and supply, leading to significant fluctuations influenced by market conditions and news.

This is important to understand because there is a slight misconception that beginners have, which is that subscribe to an IPO and sell the shares on the listing day.

This strategy only works if the share price moves in only one direction, but that is not the case. It is impossible to predict the exact listing price of the stock. 

And even after an IPO, there are no guarantees that the stock price will appreciate. More often than not, the share prices of new IPOs tend to decline below their listing price. 

So, forget about the idea of subscribing to an IPO just for listing gains and think on a more long-term basis.

Increased Scrutiny

Going public exposes the company to direct scrutiny from the public along with the regulators and analysts, who are looking to tear into company information to understand every single detail. 

The company must disclose financials, business operations, and other information, offering transparency to investors and inviting closer monitoring.

Apart from this, there are critical compliance checks that have to be met. Avoiding such measures could result in legal issues. 

Corporate Governance

Post-IPO, the company's corporate governance also undergoes increased scrutiny.

The directors must act in the best interest of shareholders, enforcing good corporate governance practices, including committees like the audit and compensation committees. 

This is all kept in check with constant investor presentations, press conferences & quarterly reports, which are addressed & authorised directly by the directors of the company

Now, to understand a little more about IPOs, let us have a quick look at some of the most successful IPOs.

How To Apply for IPO on Angel One?

1.  Login to the Angel One App or website and click on ‘IPO’ on the homepage.
2. Select the IPO you are interested in.
3. Go through the IPO details like maximum quantity, maximum investment, about the company, etc.
4. Click on ‘Apply Now’ to apply and enter the number of lots and bidding price along with your UPI ID.
5. Confirm your bid and accept the payment mandate sent to your UPI App for successfully completing the IPO application.

That’s it! Your IPO order is placed. You can check the status of your IPO in the ‘Order Book’ section.

Case Studies 

1. Reliance Industries (1977): Pioneering India's Petrochemical Era

Reliance was a bold bet on the nation's industrial future in pre-liberalization India. This was a time when companies were not allowed to conduct business as per their will, as they had to keep in mind the strict protectionist policies. It was during this time that Dhirubhai Ambhani went on to make history. Reliance IPO roadshow garnered such tremendous interest that it is said to have kickstarted the equity cult in India. 

Some of the key drivers of success were the visionary leadership of Dhirubhai Ambani, a diversified business model encompassing petrochemicals, refining and textiles & strong brand recognition of Vimal. 

Currently, the business group is split between Mukesh & Anil Ambani brothers. Mukesh Ambani’s Reliance Industries is the largest company in India today by market capitalization. 

2. Infosys (1993): Ushering in the IT Revolution

‘Startups’  and ‘Entrepreneur’  are 2 keywords that are trending nowadays however, this culture of entrepreneurship has existed in India for quite some time, and the most notable example of ‘scaling up’ is Infosys. 

Started by a team of a few young software engineers led by Narayana Murthy and brought in an IT revolution in the country. Surprisingly, their IPO went undersubscribed as nobody really believed in the company, but today, Infosys is the benchmark of corporate governance. It has delivered humungous returns to its stakeholders.

 Some drivers of success were a skilled workforce, a focus on quality and client satisfaction, and early adoption of global delivery models.

Some lessons learned were that building talent, prioritising quality, and embracing globalisation were crucial to Infosys' success. 

3. Maruti Udyog (2003): Putting India on Wheels

Maruti’s IPO differed slightly from the previous IPOs we saw. Maruti was a Government collaboration to bring affordable cars to the masses through the humble Maruti 800. This IPO is often overlooked but has proven to be one of the most successful IPOs in history. A strong reason for growth has always been the company’s understanding of Indian people. They have delivered cars that suit the lifestyle & income of the people in India. This gave me an immense sense of pride, too, because it is only one of the few automobile manufacturers in India. 

In case you are still wondering, Maruti Udyog and Maruti Suzuki are the same company. Maruti Udyog was the company's original name, established in 1981. It was later renamed Maruti Suzuki India Limited in 2007. The listing price was around ₹134 per share (2003), much above the anticipated valuation due to the fact that the IPO was 11.83 times oversubscribed. 

Since listing, the share price has gone up over 40 times the issue price, and some drivers of success were the First-mover advantage in a virtually non-existent car market, the iconic Maruti 800 model and a strong distribution network. 

Addressing the unmet needs of an aspiring nation, building a solid brand, effective pricing, and efficient distribution are key elements of Maruti's success story.

4. DMart (2017): Retail Redefined

Dmart came in with a bang and disrupted the traditional grocery market with a focus on value and convenience. This hyperlocal retail business was started by a stock market veteran - Radhakrishna Damani, who was a close aide to the Big Bull - the Late Mr Rakesh Jhunjhunwala. 

Dmart came into the IPO with a simple proposition. Sell local goods & products that are used for daily purposes at the lowest prices possible. They have managed to do exactly this for some time & they have expanded the same model across the country now. This resulted in a big oversubscription of over 85.25 times and the listing price was around ₹299 per share in 2017. Today, with a share price of over ₹3800 (as of 4th March 2024),  Dmart is one of the most successful IPOs in recent times. 

Some key drivers of success were - Efficient sourcing and cost control, a focus on fresh produce and private label brands, and an omnichannel strategy.

Some lessons to be learned from this company are Identifying market gaps, offering a value proposition, and embracing innovation. 

These were only a few key IPOs that we looked at. However, do note that successful IPOs do not come along daily, and it takes time for the IPO to unfold. For example - Infosys share prices fell below the listing price soon after it started trading on the exchange. Therefore, it takes a long-term view to judge how an IPO performs in the stock market. 

Conclusion 

Going public is a significant milestone, and while the post-IPO period brings challenges, it also offers a path for growth, access to capital & analyst coverage, which can all put the company into the limelight overnight.

So, this was all about the process of IPOs, but we have yet to cover a few crucial aspects, such as How IPOs are priced and what is the difference between a fixed-priced issue & a book-building issue.

We will cover both these topics in the next chapter & also learn some common jargon along the way.