IPO: What are the steps involved and how does it work?

What is IPO?

IPO (Initial Public Offering) is a private company’s action to become public. Investment banks help private companies sell their shares on the general market, which involves a great deal of due diligence, marketing, and regulation.

In the transition to public companies, private investors can receive premiums on their investments, allowing them to complete their investments with total gains. Meanwhile, public investors can take part in the offering.

IPO: why do companies do it? How does it benefit them?

With an IPO, companies can access public equity and ensure private investors profit from their investments as they transition from private to public ownership.

• A major benefit of IPOs is the ability to raise capital for research and development, business expansion, capital expenditure, and debt repayment.
• IPO builds public awareness by exposing the company and its products to a new group of potential customers, which may increase its market share.
• The IPO investment is an equity investment. Equity investments in the past have given a return of 14 – 20% over five years. As such, IPO investments can meet all of your long-term financial objectives.
• Investors can cash out their investments after a company goes public by selling its shares in the open market.

How does IPO help a company? 

1. Fund Expansion by raising capital

Raising capital is one of the main benefits of having an IPO. It helps increase the company’s scope for growth and development by enabling it to conduct more research, build infrastructure, expand corporate operations, Etc.

2. Performing a value assessment

As soon as a company’s stock is listed on the exchange, it has the same value as investors are willing to pay. This way provides an outsider’s perspective on the company’s value at present. When a company merges with another or acquires another, getting a valuation is critical before expanding it.

3. Make the organization more credible.

The strict control of SEBI makes it possible for companies to provide their financial information to the public, improving transparency and building credibility among the public.

How should a company proceed with an IPO –

1^st Step – Hire Investment Bank or Underwriters

Underwriters: Who are they?

An initial public offering underwriter is a financial specialist who works closely with issuers to determine the initial offering price, when the securities are to be issued, and how they will sell to investors.

Underwriters act as intermediaries between companies and investors in the process of an initial public offering. These experts provide assurances about the amount of capital being raised.

1st Step – Hire Investment Bank or Underwriters

The company will obtain financial advice from financial experts, such as investment banks, to conduct its initial public offering. They assure that the company will be able to raise the capital it needs and act as an intermediary between it and investors:

A comprehensive underwriting agreement will also be signed by the experts, which will include the following components:

• Details of the deal
• Raising money
• Issuing details of securities

2^nd Step – IPO Registration

A registration statement and draft prospectus are required for this IPO step, known as a Red Herring Prospectus (RHP). As per SEBI and the Companies Act, this document contains all mandatory disclosures. Here are some of the critical components:

• Defining terms: Defining the terms used in the industry is included.
• Risk Factors: Financial implications are discussed in this section.
• Use of Proceeds: The purpose of this section is to explain the use of investors’ money.
• Industry Description: In this section, you will find information regarding how the company is doing in its industry segments.
• Business Description: This section outlines the company’s core business activities.
• Management: Key management personnel is described in this section.
• Financial Description: The auditor’s report is included in this section.
• Legal and Other Information: Detailed information about the lawsuits filed against the company is included in this section.

Following the submission of this document to the registrar of companies, the company can apply to SEBI for an IPO three days before the open invitation for bids is extended. The registration statement must also comply with SEC rules.

3^rd Step: SEBI Verification process:

Upon approval by the market regulator, SEBI, the company can then announce its IPO date after they have verified the disclosure of facts by the company.

4^th Step: Applying for a listing on the stock exchange

A stock exchange application is now required for the company to float its initial offering.

5^th Step: Creating a presence in the market

To attract investors, companies going public advertise their impending listing through business events, media ,communications and road shows nationwide in the lead-up to their IPO.

6^th Step: IPO Pricing

An IPO price can now set through either Fixed Price Offerings or Binding Offerings. Fixed Price Offerings announce a price in advance, while Binding Offerings allow investors to bid within a 20 percent price range. When bidding, investors must bid for the minimum number of shares as specified by the company in its Lot Price, which represents the maximum bid price. Once the bidding process is complete, the Cut-Off price will be determined. Investors are given two weeks after the conclusion of the bidding process to change their bids.

7^th Step: The allocation of shares

When the IPO price is chosen by the underwriters and the company, shares will be allocated to investors within ten workings days of the last bidding date.

Startup Banking: Moving Forward

There has been a sharp rise in startups in India recently. Companies like Bajaj Energy, Go Airlines, and MobiKwik have recently gone public through IPO, proving that the entrepreneurial ecosystem is booming in the country.

A similar shift in the financial operations of businesses today has been facilitated by new-age business banking.

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FAQ’s

1. When can a company go for IPO in India?

The applicant company must be listed on a recognized stock exchange for at least three years or have had a nationwide trading terminal for at least six months, with an average daily turnover of at least Rs.10 lakhs during the last six months (value).

2. How to check the IPO allotment status?

As soon as the allotment is completed, IPO investors can check the allotment status on the registrar’s websites, and BSE, NSE, CDSL, and NSDL will inform them via email and SMS of the new IPO allotment status.

3. What is IPO in the share market?

IPOs in share markets are the first sale of a company’s stock by a private company to the public. IPOs mean a company’s ownership is transferred from private to public.