What Do You Understand By IPO Cycle?

Key Highlights

• An Initial Public Offering (IPO) occurs when a company issues its first shares to the public. A company can raise working capital by going public to expand and take care of other corporate needs.
• The IPO cycle includes hiring underwriters, preparing DRHPs, getting SEBI approval, marketing, determining price bands, investor bidding, shares allotment, and listing.
• A successful IPO cycle raises capital and enhances visibility for companies.
• A downside of the IPO cycle is the cost, the additional staffing, and the amount of time it takes.

What is the IPO Cycle?

An IPO cycle refers to the entire process of launching an IPO. For a company to get listed on stock exchanges and raise money from equity markets, various steps must be taken. A company can only move on to the next step of the cycle after completing the previous step.

Several regulatory compliances must be completed, mainly with SEBI, the Securities and Exchange Board of India. A properly structured and extensively documented process is followed to create and issue an IPO. The transformation a company undergoes when going public warrants all that bureaucracy.

To become publicly traded, a company must hire one or more investment bankers to manage the entire process and act as underwriters. If a company has a legal department, hiring a team of lawyers or engaging them is essential to ensuring legal compliance.

Different Stages of the IPO Cycle

After understanding the IPO cycle meaning, let’s understand the stages/ steps involved in the IPO cycle:

Step 1: Hiring an Underwriter An IPO cycle begins with hiring an investment banker to act as an underwriter. An underwriter is responsible for analysing the market, the financials, and the fundamentals of the company issuing the bond. Initially, the banker signs an underwriter agreement with the issuing company.

Step 2: Preparation of the DRHP Private companies planning to launch their IPOs are required to file DRHPs with the Securities and Exchange Board of India (SEBI). The DRHP contains all information about the IPO and the issuing company, including financials, strengths and weaknesses, and estimated IPO size. Underwriters assist the company in preparing this document.

Step 3: Getting SEBI’s approval SEBI must approve the DRHP once the company has prepared it. An IPO application is approved or denied by the market regulator based on the details in the draft papers.

Step 4: Marketing When a company receives SEBI's approval, it begins marketing its IPO. A company might hold a roadshow across the country, advertise in various media, and visit major commercial hubs. It is primarily intended to attract High Net-worth Investors (HNIs) and inform them about the company's growth prospects and business plans.

Step 5: Deciding the Price Band The next step is to choose a price range for the IPO. In this range, prospective investors can place bids on the shares. The price band is determined after consulting with the underwriter based on several factors, including the issuing company's fundamentals and growth potential. In an IPO, the price band decides the final size.

Step 6: Investor Bidding After deciding the price band, an IPO opens for public bidding. In this period, several investors bid for IPO shares.

Step 7: Allotment of Shares As soon as the bidding window closes, the issuing company begins the share allotment process. In the event that an IPO is undersubscribed, all subscribers receive shares. In the case of an oversubscribed IPO, the allotment is done by lottery.

Step 8: Listing Listing occurs after the bidding process has been completed and the shares have been allocated. As soon as the shares are listed, they can be traded freely on secondary markets.

Advantages of Going Through IPO Cycle

• IPOs are primarily used to raise capital. By selling shares to the public, companies can raise large sums of money to fund operations and growth. As a result of this cash infusion, a company can expand its operations, develop new products, and hire new employees.

• An IPO also enhances a company's visibility. Going public helps a company build brand awareness and name recognition. A higher level of visibility can attract new clients and partners.

• IPOs also provide shareholders with liquidity. If shareholders need or desire to cash out their investments, they can do so. In the open market, a company's shares can be bought and sold once it goes public.

Disadvantages of Going Through IPO Cycle

• Cost is a major drawback. The cost of listing shares on a stock exchange and ongoing costs like compliance and auditing are high for companies.

• Companies that are publicly listed may also need to hire additional staff to cope with the increased public scrutiny.

• The time commitment is also a potential drawback.

Conclusion

An IPO cycle describes the process by which a company becomes publicly traded. It can be lengthy and complex, but it is worthwhile for companies that want to enter the public market. It can be costly and time-consuming to make a company public, so it is essential to weigh the pros and cons before moving forward. When a company isn't growing or profitable, an IPO may not be the best option. An IPO cycle involves both positives and negatives, so it is a big decision that needs to be carefully considered. By acquiring shares of promising companies at reasonable prices, you can invest in IPOs for long-term profits. Make sure to consult an expert such as Kotak Securities before making financial decisions related to stock trading.