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:
These financial experts carry out the IPO process on behalf of the company. They act as intermediaries between the company and the investors.
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 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 are collated in this document as well. The sections include:
This is the time when SEBI verifies the facts disclosed by the company. It looks for errors, omissions, and discrepancies. Only after SEBI approves the application can the company set a date for the IPO.
The company files an application with the stock exchange where it plans to float the initial issue.
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, the 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.
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:
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 which any individual can access. To help out investors, companies may also arrange small group meetings a few days or weeks before floating the IPO.
There are two types of IPO processes. They are:
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, that 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.
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:
Finally, the issues are sold on the primary market and the money is collected from the investors. The bidding period is usually about five working days.
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 IPO jamboree is a months-long process. 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.
0 people liked this article.