An initial public offering (IPO) marks a company's transformation from a privately held company to a publicly traded one, allowing investors to buy and sell shares on a stock exchange. IPOs allow companies to raise capital for growth and expansion while enabling investors to participate in the company's success. So how does an IPO work? Let's find out.
Before initiating an IPO, a company must comply with various regulatory requirements. The company must demonstrate strong financial performance, have a sound business model, and meet specific listing criteria. Once done, it involves the following processes:
The IPO process requires a deep analysis of the company's financial parameters, which is within the purview of financial experts. The underwriters from the investment bank oversee the entire IPO issuance and act as intermediaries between the company and its prospective investors.
These experts also evaluate other critical parameters of the company and execute an underwriting agreement that encompasses the following components:
Every company must comply with the Indian Companies Act by preparing and issuing an IPO registration statement, including a draft prospectus known as a Draft Red Herring Prospectus (DRHP). The prospectus serves the purpose of providing investors with the following information:
Once the company submits its registration statement and the DRHP to the registrar, it can formally apply for an IPO with SEBI. Later, SEBI verifies the company's disclosure of facts. If SEBI approves the application, the company can announce an IPO date. Post SEBI's approval, a company applies to stock exchanges for floating its IPO issue.
Once the company finalizes the IPO issue, it can initiate marketing efforts for its issue. These efforts may include social media marketing, conducting roadshows, placing advertisements, and more. The primary objective is to maximize the subscription of the issue by attracting as many investors as possible.
The company consults investment bankers to finalize the price of each share before its IPO goes public. This can be done through either a Fixed Price IPO or a Book Building Offering. In a Fixed Price Offering, the company announces the price of its stocks in advance. In the case of a Book Building Offering, a price range of 20% is announced. Investors can place their bids within that price bracket.
In the bidding stage, investors place bids according to the company's quoted lot price. The booking typically remains open for three to five working days, allowing investors to revise their bids during this period. Once bidding concludes, the company determines the cut-off price, which represents the final rate at which the issue is sold.
After the IPO concludes, the company, in collaboration with the underwriters, determines the allocation of shares to each applicant. In the case of oversubscription, where the demand for shares exceeds the available supply, applicants receive partial shares within 10 working days. Also, in such scenarios, the company must devise a fair and equitable method to allocate shares to the applicants.
A company is eligible for IPO if it satisfies the following criteria:
An IPO offers companies the opportunity to raise capital and grow their businesses while investors can participate in the success of these companies. Understanding the IPO process is essential for investors to make informed decisions and navigate the dynamic stock market. By following the steps, you can better understand how IPOs work and be better equipped to make investment decisions in the future.
An initial Public Offering is when a private company goes public. In an IPO, the company offers its shares to the public for the first time, allowing individuals and institutional investors to purchase ownership stakes in the company.
It works in two ways - online via ASBA and offline. The online ASBA process is more convenient as it temporarily blocks funds and debits the amount when shares are allotted. For the offline process, contact your broker.
The investment banks that underwrite the deal set the price of an IPO. They analyze the company's financials, growth prospects, and investor demand to establish a price range for the IPO. The final price is calculated based on the level of demand from investors.
Launching an IPO and listing as a public company in India involves completing various steps. However, a company typically takes 6-9 months to file its DRHP and finally list as a public company.
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