IPO Process in India

An Initial Public Offering (IPO) marks a pivotal milestone in a company's growth and expansion journey. It provides an opportunity for businesses to raise capital and broaden their operations by offering shares to the public. In India, the IPO process is regulated by the Securities and Exchange Board of India (SEBI), which mandates several steps and compliance requirements for companies seeking to go public.

A comprehensive understanding of the IPO process is essential for companies considering an IPO, investors interested in new offerings, and finance professionals. This article will provide a detailed overview of the step-by-step IPO process, from preparing the prospectus to the eventual listing on the stock exchanges.

What is the IPO process?

An initial public offering (IPO) is when a privately owned company sells its shares to the public for the first time. Before an IPO, the company is private, meaning it has only a small group of shareholders, like investors, founders, and family members.

After the IPO, the company becomes public and its shares are listed on a stock exchange, allowing anyone to buy and sell it. This process is also called going public.

How does an Initial Public Offering (IPO) work?

An Initial Public Offering (IPO) process offers several benefits for both companies and investors. The below points will help you understand the significance of the IPO process.

Raising money: Companies do an IPO to raise funds. The money they get from the IPO can help them grow and seize new opportunities.

Boosting brand recognition: Being listed on the stock market increases a company’s visibility and credibility. It helps the company attract new investment, talented workers, and potential business partners.

Selling shares for existing owners: An IPO gives current shareholders (like company founders or early investors) a chance to sell their shares. Before the IPO, it’s hard to sell shares in a private company, but once listed, it’s much easier.

Setting a market value: During the IPO, the company decides how much its shares are worth based on what investors are willing to pay. This process helps establish the company’s market value.

Access to more funding: By going public, a company can access a larger pool of money from the capital market. In the future, it can issue more shares or bonds to raise additional funds for growth.

What is the IPO process?

A company must follow the steps required by the stock exchange(s) where it wants to list its shares after the IPO. The process for an IPO in India is as follows:

Merchant Banker Appointment: The Company hires a Merchant Banker (Lead Manager) to help with the IPO. They assist with everything from preparing documents to supporting the company after the IPO.

DRHP Approval from SEBI: The Company prepares a document called the Draft Red Herring Prospectus (DRHP) and submits it to SEBI for approval. This can take 2 to 4 months.

IPO Application to Exchanges: The Company, with help from the Merchant Banker, submits the IPO application and DRHP to the stock exchanges for approval. The exchanges review the application and approve it in principle.

Price Determination: The Company and Merchant Banker decide how to set the price of the shares:

• Fixed-price offering: The price is set before the IPO.
• Book-building offering: The Company sets a price range, and investors can bid within that range. The final price is set after the bidding.
• RHP Submission: The Company files an updated version of the DRHP called the Red Herring Prospectus (RHP) with the stock exchanges. It includes the latest information about the company and the IPO.

Road Show: The Company and Merchant Banker promote the IPO by meeting investors, journalists, and analysts in different cities. This is called an IPO roadshow.

IPO Open for Anchor Investors: The IPO is first open to Anchor Investors, who are large investors (such as institutional buyers) that buy a minimum amount of shares before the IPO opens to the public.

IPO Open for Public: The IPO is then open to the public. People can apply for shares by placing bids. The offering is open for 3 to 10 days. Applying doesn't guarantee getting shares, as allocation is often done via a lottery.

IPO Shares Allotment: After the offering closes, the applications are checked, and shares are allotted to investors. The money is withdrawn from their bank accounts, and the shares are transferred to their demat accounts.

IPO Listing Date Announcement: The Company announces the date when the shares will start trading on the stock exchange. The shares are credited to the investor’s demat account, and the exchange issues a circular with details about the shares.

IPO Shares Listing: On the day the shares are listed, there is a pre-open session from 9:00 am to 9:45 am., where orders can be placed, changed, or cancelled. The opening price is determined from 9:45 am to 9:55 am. Trading starts at 10:00 am.

Post-Listing Documents: After the IPO is listed, the company has to submit reports to the stock exchange, including board meeting invites, annual reports, shareholder details, and audit reports.

What are the metrics for judging the performance of an IPO?

The below metrics are used for judging the performance of an IPO:

Market Capitalization: An IPO is considered successful if the company’s market value is the same as or greater than other companies in the same industry within 30 days after it goes public. Market value is calculated by multiplying the stock price by the total number of shares the company has.

Market Pricing: An IPO is considered successful if the difference between the initial offering price and the company’s market value, 30 days after the IPO, is less than 20%. If the difference is more than 20%, the IPO’s performance might be questioned.

Conclusion
The price of stocks may go up or down once they start trading in the secondary market after an IPO. There are rules by SEBI that require promoters and non-promoters to keep their IPO shares for a certain period. When this period ends, the stock price might briefly drop. Now that you understand how IPOs work in India, take a look at the latest IPOs on BlinkX. Start your investment journey today!