The Initial Public Offering(IPO) is one of the widely adopted ways for most companies to turn from a private company to a publicly traded company. Companies issuing shares for the first to the public raise funds for numerous purposes such as research and development, expansion, etc.
But it is a lengthy and technical process. That is why companies take external help from underwriters, investment bankers, lawyers, auditors, and many other institutions.
You must know that the whole process is regulated by the Securities Exchange Board of India(SEBI). All the companies going through the process have to comply with the guidelines given by SEBI to protect the interests of investors.
If you are keen on investing your money in IPOs, you must know what the process looks like. So, in this blog, we're going to look at what is the process of IPOs in India so you can make informed and better decisions.
What is the process of IPO? Explain in steps.
Step 1: Hiring An Investment Banker
The first step towards becoming a public company is to hire an investment banker or underwriter to get guidance on the further steps of the process. Underwriters or investment bankers work as a mediator between the company and investors. After reviewing the company's crucial information, an underwriting agreement will be signed. This agreement will include information like:
- The amount to be raised
- The type of securities to be issued
- Other details of the deal
All the information is decided after studying the company's assets, liabilities, financial position, needs, etc.
Step 2: Preparing The Red Herring Prospectus And Registering With The SEBI
Next, it's time to prepare the registration statement and the prospectus. The prospectus is known as Draft Red Herring Prospectus. As per the Companies Act of 1932, companies must prepare this prospectus as it contains all the essential information about the company.
Here are the crucial segments of the prospectus:
- Definitions or/and abbreviations: This section includes the meaning/full form of the technical jargon related to the field.
- Purpose of the issue: This section answers, "why is this company issuing IPO"?
- Risk factors: This section includes all the risk factors that could hamper the company's finances.
- Legal information: This part describes all the crucial legal and miscellaneous information about the company.
- Funds usage: The information under this part includes how the funds raised through IPO will be used.
- Management: It contains all the information about the key personnel investors need to know.
- Promoters: All essential information about the promoters of the company is listed here.
- Strengths: RHP must also include a company's strengths and how it will outshine its competitors.
- Others: Apart from the information mentioned above, RHP must include essential data like strategies, business description, capital structure, etc.
The company has to submit the prospectus to the Registrar of companies at least three days before bidding.
Once the documents are submitted, an application for IPO can be submitted.
Step 3: Verification By SEBI
Once the SEBI has received the registration statement, it will verify all the details. If the statement complies with the guidelines given by SEBI, approval is given. But if any deviations or corrections are needed, SEBI passes comments on the same. The company shall work on the suggestions and apply for registration once again.
If SEBI is fully satisfied with the documents and registration statement, the company can decide the date for the IPO. Finally, a financial prospectus can be released by the companies.
Step 4: Applying for the stock exchange
Now, the company shall decide on the stock exchange where it's willing to list its shares and make an application to them.
Step 5: Getting On The Roadshow
It's high time to create a buzz in the market. Around two weeks before the launch, promoters and company executives travel around the country and do the advertising. Extensive marketing is done to attract potential investors towards the IPO.
Executives take various steps to share essential information with potential investors, such as giving presentations, arranging meetings, setting up Q&A sessions, etc.
Step: 6 Pricing The Issue
Steps are initiated to set the pricing of the shares. Two widely adopted methods are fixed-price issues and book-building methods. Let's have a look at each of them.
Fixed pricing method: In this method, the company, along with its underwriters, decides the price of its issue in advance. The price of the issue is set based on various factors such as competitor analysis, market trends, number of shares being offered, potential growth rate, etc. Investors interested in the issue must submit their applications for the predetermined prices only.
Book building method: Under this method, instead of fixing the prices in advance, the company offers a price range to potential investors within which they can bid their applications. The range includes a floor price (minimum price) and a ceiling price (maximum price). The final price is decided based on factors like the demand of the issue, the number of biddings, etc. The final price may also be called the cut-off price. Since the prices are determined after analysing demand in the market, it is a more efficient and flexible method. Investors usually have 3 to 5 working days to submit and alter their bids.
Step 7: Making Applications Available To Investors
This step involves sending applications to interested applicants. These applicants can easily get these applications through their brokers or banks. They have around five working days to submit such applications. Payment can be made through cheques or online.
After five working days, the bidding is wrapped up. The prospectus is submitted to the Securities Exchange Board of India and Registrars of Companies by the company. This application includes information such as:
- The final price (cut-off) at which bidding was closed
- The allotted shares quantity
Step 8: Finalizing Allotment
The final step involves allocating shares to the applicants. It means deciding how many shares each applicant will receive. In a normal subscription, each applicant gets their desired number of shares. But in the case of oversubscription, the allotment may be made on a partial or pro-rata basis. Let's say the company's IPK was oversubscribed two times. Then, the applicant applying for Rs 6 lakh shares will only get Rs 3 lakh worth of shares. The excess money is returned to the applicants. The shares are transferred to the subscriber's Demat accounts.
The allotment process is usually done within ten working days of the final day of bidding.
By now, you know what an IPO process looks like and what you should consider while investing. Since it involves a high level of risk, you must know how to make informed decisions. Other factors you should keep in mind while investing in the initial offerings of companies are trading platforms. Before selecting a trading platform, you must pay attention to factors like Demat account opening charges, AMC expenses, etc. Efficient and clean platforms can smooth your investing game and prevent you from paying extraordinary charges.
Frequently Asked Questions
What are the three types of investors interested in first-time issues of the companies?
Three categories are Qualified Institutional Buyers (QIB), Retail Investors, and Non-Institutional Investors (NII).
What is the process of IPO allotment?
It is decided based on demand in the market. In the case of under subscription, investors get all the lots of shares applied. And in oversubscription, the allotment is done based on a pro-rata basis.
What is Initial Public Offering?
It is the process by which a private limited company turns into a public company by selling its shares to the common public.
Is IPO risk-free?
It is a highly risky affair as investors may experience the prices of stocks declining on the listing date. Hence, such investments are only taken by experienced and high-risk-taking investors.