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What is IPO Cycle? Explain the Process

An IPO or Initial Public Offering is a type of public offering in which company shares are sold to investors. IPOs are typically undertaken by companies looking to raise capital and offer a way for companies to go from being private to publicly traded. When a company goes public, it means that its shares can now be bought and sold on the open market.

What is an IPO cycle?

The first step is to file a Draft Red Herring Prospectus with the Securities and Exchange Board of India. It is the process by which a company goes public; it raises money through an Initial Public Offering (IPO). The final step is to price the IPO and list it on stock exchanges.

IPOs can be risky as there is often a lot of hype surrounding them, and it can be challenging to know if a company is truly worth its valuation. However, they can also offer investors the chance to get in on the ground floor of a potentially successful company.

What are the different stages of an IPO cycle?

The IPO cycle refers to the different stages a company goes through to complete an IPO.

Pre-IPO transformation phase: The first stage is the pre-IPO transformation phase.

This is when a company goes public and raises capital to fuel its growth. The company will typically undergo a major transformation during this time, including adopting new accounting standards and reporting requirements. The company will also need to disclose its financials to the public, which can be daunting. But with proper planning and execution, the pre-IPO transformation phase can be a success.

IPO transaction: The second stage is the transaction, in which shares are sold to investors.

The IPO transaction is typically managed by an investment bank, which acts as a middleman between the company and potential investors. The investment bank will work with the company to set an appropriate price for the shares being offered.

Once the share price has been set, potential investors can place orders for shares through the investment bank. If there is enough demand for the shares being offered, the transaction will go through, and shareholders will be allocated accordingly.

After the IPO transaction has been completed, shares will begin trading on a stock exchange and can be bought and sold by any member of the public.

IPO post period: After a company goes public, it enters the third stage, the post-period.

In this stage, the underwriter begins to sell off their remaining shares, and the stock price becomes more volatile. The company is also under more scrutiny from investors and analysts. This can be a difficult time for a company, but if they can weather the storm, they can emerge stronger on the other side.

India is a member of the International Organization of Securities Commission (IOSC) and has a well-developed capital market. The Securities and Exchange Board of India (SEBI) is the regulator of the capital market in India.

Explain the IPO process in India

Hiring an investment bank:

The first step in going public is hiring an investment bank which will help the company determine the number of shares to sell, what price to sell them at, and when to sell them.

Second, prepare and submit the necessary documents:

All the necessary documentation for the IPO must be prepared, which includes a prospectus. A prospectus is a legal document. The Red Herring Prospectus (RHP) contains information about the company's business, financial condition, and risk factors. It also includes details about the shares that will be offered for sale. The prospectus must be registered with the Securities and Exchange Board of India (SEBI).

Once SEBI approval is obtained, the company can begin marketing the IPO to potential investors. Once trading begins, shareholders can buy and sell their shares on stock exchanges. The price of the shares is typically set based on demand from buyers.

Third, go on a roadshow:

When a company decides to go public, it typically engages in a roadshow. This is where company executives will travel to various cities to meet with potential investors. The goal is to generate interest in the company and its IPO.

During the roadshow, executives might talk up the company's prospects and try to get potential investors excited about the opportunity to buy shares in the IPO. They will also answer any questions that investors may have.

The roadshow is an important part of the IPO process because it can help to determine how successful the offering will be. Suppose there is a lot of interest from investors. In that case, it is likely that the IPO will be oversubscribed and that the company will be able to raise more money than it originally anticipated.

Fourth, IPO is priced:

This is done in consultation with investment banks that are helping to underwrite the offering. The price of the shares is determined based on several factors, including the current market conditions, the expected demand for the shares, and the company's financial performance. Price, once set, cannot be changed. Once priced, shares can begin trading on an exchange.

Fixed Price Method: It is the most common type of IPO. In this type of offering, the investment bank underwrites the entire deal and sets a fixed price for the shares being offered. The benefit of this method is that it allows the issuer to know precisely how much money will be raised from the offering. However, it also means that there is less demand for the shares since investors understand what they will pay for them.

Book Building Method: The other method is to price and allocate shares in an initial public offering (IPO). Under this method, investment banks manage the IPO process and work with the company going public to come up with an estimated price range for the shares. They then take orders from institutional investors interested in buying shares and allocate them based on demand. Book building aims to ensure that as many shares as possible are sold at or above the estimated price range. This ensures that the company can raise as much money as possible from the IPO.

Fifth, the availability of an IPO to the public:

On the planned date, paperwork for issuing an IPO to the public is made available to the public. Once the document is submitted, it is sent to the Securities and Exchange Board of India (SEBI) within the strict time limits of availability of a public offering which is usually within five working days. The company makes its shares available for purchase by the public. The price of each share is determined by supply and demand in the market.

Sixth, going through the IPO:

On the day the IPO goes public, shares are sold to investors at a set price. Investors who are interested in participating in an IPO can do so through a broker. Once an investor has purchased shares in an IPO, they may hold onto those shares or sell them on the open market.

What are the benefits of going through an IPO cycle?

The benefits include raising capital, increasing visibility, and creating liquidity.

What are the drawbacks of going through an IPO cycle?

Despite the benefits, there are also some drawbacks that companies should be aware of before they decide to go through an IPO cycle in India.

One of the main drawbacks is the cost. Companies have to pay a lot of money to list their shares on a stock exchange and ongoing costs like compliance and audit fees.

In addition, companies may need to hire additional staff to deal with the increased public scrutiny that comes with being a publicly listed company.

Another potential drawback is the time commitment.

Conclusion:

In conclusion, the IPO cycle is a process that companies go through in order to become publicly traded. The process can be long and complex, but it is worth it for companies who want to tap into the public markets. Making a company public can be costly and time-consuming, so weighing the pros and cons before moving forward is essential. An IPO may not be the best if a company is not growing or profitable.

Pros of an IPO include raising capital, increasing visibility, and creating liquidity for shareholders. However, there are also several drawbacks to consider. Going public can be complex and expensive, and it can also put a lot of pressure on a company to perform. There is also the risk that the stock price will not meet expectations.

Overall, an IPO cycle is a big decision with both positives and negatives to consider. It's essential to speak with experts before making a final decision about whether or not an IPO is right for your business.

Frequently Asked Questions (FAQs):

Q. What is the difference between NFO and IPO?

Both NFO and IPO are terms used in the investment world. NFO stands for New Fund Offer, and IPO stands for Initial Public Offering. The difference between NFO and IPO is that NFO is when a fund house launches a new Mutual Fund scheme and IPO is when a company sells shares to the public for the first time.

Q. What is a Deemed Prospectus?

A deemed prospectus is a filing that allows an issuer to avoid having to file a new registration statement each time it sells securities in a primary offering. A deemed prospectus is effective for up to one year from the date it's filed unless another filing supersedes it.

Q. What is an Abridged Prospectus?

It is a document containing certain key information about a company planning to go public. This information includes the company's financial statements, business model, and risk factors. The aim of an abridged prospectus is to give potential investors a brief overview of the company before deciding whether to invest in its stock.

Q. What is Shelf Prospectus?

Any company that wants to raise money from the general public must submit a prospectus to SEBI. The company must submit a red herring prospectus, also known as an IPO prospectus, outlining the company and the IPO in great detail if it intends to go public.

Similarly, a corporation must submit a shelf prospectus when it wants to raise money by selling bonds. The document will include all information on the issued securities, such as their price and maturity date. This serves as a marketing piece for the bond issue as well as a legal document.