Process of IPO in India: A Step-by-Step Guide for Investors

For a business that has decided to go public, the road to launching an IPO is a long and lonely one. Typically, an IPO process takes six to nine months. The following outline should give you an idea of all the steps involved:

The IPO Process

Step1: Appointment of Investment Bankers/Underwriters

The first step of the IPO process involves the company appointing investment bankers or underwriters to carry out the public offering. These financial experts act as intermediaries between the company and investors. They provide advisory services to help determine initial valuation and offering size. The underwriters also manage regulatory compliance, filing paperwork, building an investor order book, assisting with marketing, and ultimately selling the shares to institutions and the public through their distribution network.

Step 2: Registration for IPO

The investment bank and the company prepare a registration statement and a draft prospectus. Known as the red herring prospectus (RHP), it is the most important document that a retail investor has access to and can use to evaluate the offer. The document details all the information about the business, with the exception of price or quantum of shares being offered. All businesses have to submit the red herring prospectus. According to Section 32 of the Companies Act:

• The company offering an IPO needs to submit the Red Herring Prospectus with the Registrar of Companies at least 3 days before the offer is opened to the public for bidding.

• All the obligations that the company’s prospectus will have, should also be contained in the RHP. Any variations between the two will have to be highlighted and be duly approved by SEBI and ROC.

• Once the IPO bidding is closed, the company has to submit the final prospectus to both ROC and SEBI. This should contain both the quantum of shares being allotted and the final issue price on which the sale is closed.

The RHP is the document that the issuer and the underwriters use to market the IPO with. It is the most important tool that a retail investor has access to and can use to evaluate the offer. The document contains all the financial and other information about the company. All the mandatory disclosures that SEBI and the Companies Act mandate are collated in this document as well. The sections include:

• Definitions: All the important issues and industry specific keywords are defined in this section. For investors analysing an offer from an industry they are already familiar with, this section may not warrant a close reading.

• Risk Factors: Every business faces risks and uncertainties. This section is meant to disclose every possibility that could have a material impact on company’s performance post listing, and the share price.

• Use of Proceeds: This is probably the most important section of the prospectus. This gives investors information about where the money raised through the IPO will be used. This is a good indicator of the direction the business will develop in, and proxy for how well the finances are being handled by the company.

• Industry Description: This section provides forecasts and predictions about the larger industry the company operates in.

• Business Description: This section talks about the core activities that the company carries out. It describes how the company generates profits. Investors pay close attention to this, as it describes what they will end up owning, if they get the shares of the company.

• Management: Details about the promoters, directors and key management personnel is provided in this section. Investment in a new company is largely an investment in the management team’s competency. Therefore, investors read this section with interest and gather whatever information they can about the people behind the company.

• Financial Information: This section contains auditor’s reports and the financial statements of the company for the previous 5 years.

• Legal and Other Information: All litigations filed against the company or a promoter or a director that are not yet settled are listed in this section.

Step 3: Cooling-Off Period

After the company files its prospectus, there is a cooling-off period where SEBI closely scrutinises the facts, figures, and disclosures made by the company. SEBI thoroughly verifies the details for any inaccurate or misleading information, errors, omissions or discrepancies compared to mandatory disclosures. This ensures investor protection. Only after the regulatory body is satisfied with the prospectus and has it updated if needed, will SEBI issue final observations and the company can proceed to set a final IPO date. This cooling-off period provides time for due diligence and improves transparency before the offering.

Step 4: Application to Stock Exchange

Once the company has filed its red herring prospectus and received approval after the cooling-off period, the next step is to apply to the specific stock exchange(s) where they want to list after the IPO. The company must meet the eligibility criteria set by the exchange. The application includes details of the proposed size of the issue, number of shares to be offered, price band, and expected timelines. The stock exchange thoroughly evaluates the company's application based on its credentials and potential to raise adequate capital through the IPO. If satisfied, the exchange provides approval as an eligible issuer that allows the company to move forward and officially launch its public issue.

Step 5: Creating a Buzz

Companies need to ensure that the IPO is a big-ticket event, much like how summer Hollywood blockbusters or the Khan tentpole movies are. One way to spread the excitement in the investor circles is through the IPO road show. Upon getting approval for an IPO, investment bankers and underwriters hired by the business get into action. They travel to important finance destinations around the world to showcase the IPO offer. Since they literally ‘take to the road’, the name ‘road show’ has stuck.

The Timing

Road shows are organised much before the IPO date. This gives investors time to decide how much to invest. Typically, the timeline is like this:

• When a company decides to go public, it employs one or more teams of investment bankers or underwriters. These teams help the company to carry out the IPO process.
  
• Upon getting approval from the market regulator, the date for floating the IPO is set.
  
• Following this, a financial prospectus is released.
  
• Soon after, the investment bankers, underwriters, and company management set out on the road shows.
  

The Process

Road shows are used to convince investors about the potential of the company. They highlight the future growth trajectory of the business as well as the expected market share. The teams responsible for the road shows also meet with business analysts and fund managers. Such professionals may offer insights that enhance the company’s IPO process. Company executives provide every detail about the IPO through multimedia presentations, Q&A sessions, and other user-friendly means. Increasingly, companies are posting online versions of road shows that any individual can access. To help out investors, companies may also arrange small group meetings a few days or weeks before floating the IPO.

Step 6: Types of IPO Processes

There are two types of IPO processes. They are:

• Fixed price issue
• Book building issue

In a fixed price issue, the price at which shares will be sold and allotted is made known to the investors in advance. Whereas, in a book building issue, the issuer offers a 20% range within which investors can bid for the shares. The final price is decided only after the bidding is closed. This 20% range is called an IPO price band. Both retail and institutional buyers are called to submit their bids within this price range. The book, which is the collection of bids that have come in for the IPO, is open to all investors. In other words, the demand for the shares offered at various prices is available for all current and potential investors. No bid price can be less than the IPO floor price, which is the lower bound of the band. Neither can it be higher than the IPO cap price, the upper bound of the band. The book is normally open for 3 days, and the bidders can revise their bids as long as the book is open. Issuers prefer book building issues over fixed price issues as the process gives them the opportunity to discover the price and demand. This way, the issuer is able to ensure that the issue generates as much value as the market is willing to provide. The price at which the issue is finally sold is called the cut-off price. This is the highest price at which all the shares offered can be sold.

Step 7: A Step Away from the Launch

This is the last step before an IPO is launched. Businesses also ensure that company insiders (internal investors) don’t trade in the IPO. That’s because:

• It helps stabilise the market without additional selling pressure from insiders.
  
• It prevents corrupt executives from pawning off overpriced shares at the expense of general buyers.
  
• It protects retail investors from a manipulated offer price of the shares.
  
• It stops the market from being flooded with too many shares that might disturb the natural demand–supply balance.
  

Step 8: Bidding Period

The company's shares are made available for public subscription during the IPO bidding period, typically lasting 3-5 working days. Investors place bids for the quantity of shares they wish to purchase within the set price band. The underwriters collect and aggregate the bids. Once the offer period closes, the final IPO share price is set based on demand. The company then receives the money from the IPO, with shares allotted to investors. The shares also start trading openly on the stock exchanges, transitioning from the primary market where it was issued to the secondary market where the stock can be bought or sold.

Step 9: Allotment

The IPO shares are allotted to bidders within 10 days of the last date of bidding. In case the IPO is oversubscribed, the shares are allotted proportionately to the applicants. For example, suppose the oversubscription is four times the allotted number of shares. Then an application for 10 lakh shares will be allotted only 2.5 lakh shares.

The Need for an Elaborate IPO Process in India

The extensive IPO process in India aims to protect investor interests and maintain fairness, transparency and order in capital markets. India has millions of retail investors, many of them first-time investors. An elaborate procedure for reviewing prospectus disclosures, due diligence by regulators, setting price bands, managing share allocations, and book building helps reduce information asymmetry between companies and ordinary investors. It minimises risks of misleading details or manipulation. Standardised steps also introduce consistency and compliance across a diverse country. While lengthening the process, the rigorous IPO mechanism tries ensuring ethical practices and reducing risks for average investors participating in public issues in an emerging market like India.

A Quick Recap

The IPO jamboree is no overnight affair – it is an extensive process that unfolds over several months. It requires the company to put on a charm offensive, launch ad blitzes, do exhaustive paperwork, solve insurmountable problems, ceaseless number-crunching and endless legwork – all to make its public debut a success.

Read more: Pre IPO Investing: Meaning, Benefits & How to Get Started