What Is the IPO Process? A Complete Guide for Beginners

IPO is a significant milestone for companies, which marks its transition from a privately held company to a publicly traded one. Companies usually make an Initial Public Offering (IPO) to raise funds from the general public in exchange for shares. The reasons could vary from business expansion, capital injection, paying off debts, and enhancing the company’s credibility and visibility. Additionally, IPO is also a great opportunity for investors.

Understanding the Need for IPO Process

When a private company goes public, it has to adhere to the IPO process as stipulated by the Securities and Exchange Board of India (SEBI). Note the process of going public is a complex and a detailed one. Before an investor invests his/her money in an IPO, understanding the need for the IPO process and how it benefits both companies and investors is essential.

Given below are some of the major reasons for going Public with an IPO for a company:

• Raising Funds – The main purpose of a company going for an IPO is to raise capital. As mentioned above, a company can go for an IPO to accelerate its growth, expand, innovate, and take its existing debts. It provides the company with the funds needed without adding to its debt.
• Access to Capital Market – Through an initial public offering (IPO), a business can access a larger range of financing choices on the capital market. To finance future expansion, it may issue more bonds, shares, debt instruments, or obtain funding from other sources.
• Better Brand Visibility – Listing for IPO provides credibility to the name of the company. An IPO helps businesses get new funding for investments which helps the business become visible, attracting better talent and strategic partnerships.
• Creating Market Value – IPO essentially involves raising funds from the market. For this, the company must determine and establish its market value. Based on market demand and investor appetite, going public allows the company to determine both sizes and price of the IPO.
• Higher Liquidity – When a company offers an IPO, along with raising funds from the public, it is also offering its existing shareholders the opportunity to liquidate their holdings. When a company is private, it has limited liquidity as shares cannot be bought and sold easily. When the shares of the company get listed on a stock exchange, the existing shareholders can trade them and dilute their investments.

IPO Process – Step by Step Guide

As a potential investor, it is crucial that you are aware of the nitty gritty of the IPO process. Here is a step-by-step guide for you to understand the IPO process in detail:

Step 1 – Hiring Underwriter or Investment Bank

After a company has decided that it will go public, the first step towards IPO is to take the help of financial experts, who are called underwriters. These underwriters, which are usually investment banks carry out the IPO process on behalf of the issuing company, right from the initial due diligence to post-listing support. The coordination between all the parties involved from start-to-end is also managed. These underwriters curate and sign the underwriting agreement which includes the deal’s details, the amount to be raised in the IPO, and all the relevant details of the securities being issued.

Step 2 – Registration for IPO

In the next step, the underwriting investment and the issuing company prepare the registration statement and the draft prospectus which is also called Red Herring Prospectus (RHP). Submission of RHP is mandatory and it enlists all the important details that must be disclosed as per the guidelines outlined under SEBI and Companies Act.

Note that the RHP consists of all the relevant details of the company except the price band and the quantum of shares to be offered in the IPO. Here is a quick description of what the Draft Red Herring Prospectus covers –

• Definition – This section defines all the important terms and industry specific keywords
• Risk Factors –There are dangers and uncertainties in any business. This section discusses all potential risks that could affect the share price and the company’s performance after listing.
• Use of Proceeds – This section explains how the company will use the money raised from the public and hence is one of the most important sections for potential investors.
• Industry Description – In this section details of the industry that the company belongs to, are discussed
• Business Description – This section explains the core business activity of the company
• Financial Description – In this section, discussion of the current financial condition, important financial statements and auditor’s report are there
• Management – In this section, necessary details about the key management personnel are given
• Legal & Other Information – This section explains all the litigations of the company and other miscellaneous but important information of the company

Step 3 – SEBI Verification

Next comes the cooling period where SEBI verifies all the information disclosed in the Red Herring Prospectus, which takes 2 to 4 months. Once SEBI gives its approval, the company can then set a date for its IPO. Note that SME IPOs do not require SEBI approval. They directly get approval from the stock exchange.

Step 4 – IPO Application to the Exchanges

Underwriters then submit the DRHP document and the IPO application to the stock exchange where the company wants to list its shares. Post verification the stock exchange gives the approval for the IPO.

Step 5 – Creating Buzz with IPO Roadshows

Going public is a big event for a company. So, the company going for IPO makes sure that enough buzz is created in the marketplace. This is done by doing roadshows over two weeks. Post stock exchange approval the underwriters and executives of the company market and advertises the IPO offer increasing its visibility as much as possible. They showcase the IPO offer to larger audiences and to a wide range of finance destinations. Note that road shows are done way ahead of the IPO date. The purpose of the roadshows is to communicate to investors the potential of the company and future growth.

Step 6 – Pricing of IPO

The price or price band is decided, depending on whether the company wants to float a Fixed Price IPO or Book Building Issue.

• Fixed price method: In this scenario, the company and underwriter collaborate to determine a price for the shares. The breakdown of the obligations, the desired capital, the stock demands, and all other pertinent information to determine a price.
• Book-building method: The book building process involves setting a price range that investors can bid within, both with the underwriter and the company. The demand for the shares, the number of bids received, and the desired capital all influence the final price. Apart from banks and infrastructure firms, most businesses can determine their share price range. The IPO issuing company is allowed to fix the cap price at maximum of 20% higher than the floor price.

Step 7 – Open IPO for Anchor Investor

Anchor investors (if any) are given the priority in the IPO. A qualified institutional buyer (QIB) who applies for an initial public offering (IPO) under the anchor investor section and makes a bid of at least Rs 10 crore is known as an anchor investor. A day prior to the issue’s public launch, the company allocates shares to the anchor investor.

Step 8 – Open IPO for Public

Next, the IPO is opened to the public. The public can now submit bids for the shares being sold in the initial public offering (IPO). An IPO remains open for at least 3 days and a maximum of 10 days. Investors submit bids for the shares that are offered while the offer is open, bidding does not guarantee allotment. The public as investors use a broker or a bank to submit their IPO applications to the stock exchange’s IPO platform. An exclusive IPO application number is given to investors.

Step 9 – Allotment of Shares

• In cases of oversubscription, where there are more applications than shares available, allotment is often done through a lottery system. This means that investors who apply for shares have a chance to receive them based on a random selection process.
• In some cases, shares are allotted proportionately among investors. For example, if the IPO is oversubscribed by 2 times and an investor applies for 100 shares, they may receive 50 shares (assuming all other applicants receive a similar proportion).
• Some IPOs give priority to certain categories of investors, such as institutional investors or employees of the company, before allotting shares to retail investors.
• The share allotment basis is often decided by the company and its underwriters based on various factors, including regulatory requirements and market conditions.
• If shares are not allotted or only partially allotted, the application money is refunded to the investors.

Step 10 – Announcement of IPO Listing Date

In the next step, the listing documents are submitted by the company to the stock market. After the shares are sent to the allottee’s account and the company receives a credit confirmation from the depository, the stock exchange publishes a listing circular to the market the next day. Information like the final price, ISIN, code, and symbol are all included in the circular.

Step 11 – Listing IPO Shares

Thereafter shares are listed in the stock exchanges, and this includes two major steps –

• Pre-opening Session: Pre-opening sessions serve as a means of setting prices for newly listed stocks. On the first day of their listing, IPOs have a special trading session. During the 45-minute Pre-Open Session (9:00 a.m. to 9:45 a.m.), orders can be entered, changed, or canceled.
• Orders submitted during the first 45 minutes are matched, the IPO’s launching price is decided, and traders receive a trading confirmation between 9:45 and 9:55 a.m.
• Commencement of Trading: On the day of listing, regular trading starts at 10 in the morning, and anyone can then purchase or sell IPO shares

Step 12 – Post-Listing Documentation

After the listing of stocks on the stock exchange is done, the IPO issuing company is required to provide the stock market with certain papers, such as board meeting invitations, annual reports, shareholding samples, audit reports, and reports on corporate governance.

IPO Process Timeline 

Tentative IPO Process Timeline in Stages 

Conclusion

IPO process can be confusing, which is why it is best recommended that as a retail investor you should take time and effort to understand the IPO process in detail. This guide has discussed every step of the IPO process in detail. Now that you have a fair understanding of what the IPO process is, it’s timelines, and allotment, you can now decide to invest in an IPO.

Make sure before you put your money in an IPO, you read the RHP and also do some research on the issuing company.