What is the IPO Cycle?

The IPO cycle is a process where a company raises capital by offering its shares to the public on the stock market. It begins with hiring investment bankers to conduct market research and prepare a Draft Red Herring Prospectus (DRHP), which is then submitted to SEBI for approval. The company markets the shares, sets a price band, and launches the IPO, with investors bidding for shares and the shares listed on stock exchanges. This article explains what is IPO cycle in depth, and how it works in the stock market. 

A Detailed Understanding of the IPO Cycle 

To define IPO cycle in simple terms, it is the step-by-step process through which a private company offers its shares to the public and gets listed on stock exchanges. The following points outline the various stages of an IPO cycle. 

1. Hiring Investment Bankers 

The IPO cycle begins when a firm employs investment bankers as underwriters to do extensive market research and analysis on the company's operations. They measure market sentiment for a forthcoming IPO by analysing financial variables such as total revenue, assets, and liabilities. The terms and conditions of the sale are outlined in an underwriter's agreement, and underwriters can intervene if IPO share values decline. Their primary responsibility is to keep share prices stable after the IPO. 

 2. Preparing a Draft Red Herring Prospectus 

Underwriters work with a business to develop a draft prospectus, which includes critical information regarding the firm's IPO, offer, and net proceeds utilisation. The preliminary document also provides thorough information on the company's history, strengths, strategies, risks, finances, legal obligations, and promoter information, which helps investors decide whether to invest in the IPO. 

 3. Submission of DRHP to SEBI 

The IPO issuing business sends its DRHP ( Draft Red Herring Prospectus) for clearance to SEBI, which extensively examines the document to verify information and assess if the company qualifies for listing. If required, SEBI may resend the DRHP to the firm with suggestions for changes. The business can move on with its IPO planning after receiving approval via an observation letter. 

 4. Advertisement 

Companies aim to build excitement among retail investors after opting for an IPO by organising roadshows, releasing news in English and regional publications, and visiting business centres. These marketing strategies are designed to spark the interest of investors and increase awareness about their upcoming public offerings. This is the next stage in the IPO process. 

 5. Setting a Price Band 

In its Red Herring Prospectus, a firm establishes a preliminary price band for its IPO, which underwriters decide based on share face value and valuation. Following SEBI clearances, the final price band is determined. Following the subscription of shares or the conclusion of the IPO window, the business decides on the issue price and minimum lot size. The issue price in a book-building offering is determined after the IPO window ends. 

6. IPO Launch 

The firm determines the IPO price range and lot size and reports in the Red Herring Prospectus for investors. Bidding dates begin on the day of the IPO's debut and terminate on the closure date, allowing participants to bid for desired shares. Investors can engage in the bidding process either online or offline. The first filing, investor roadshows, IPO price setting, and the stock's first day of public trading are a few of the IPO cycle examples.  

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 7. Allotment of IPO Shares 

Following the conclusion of the IPO subscription window, the next phase in the IPO cycle is share allotment. Management and underwriters analyse investor applications and choose qualified bids in this process. These bidders will have their desired shares sent to their Demat account. After successful asset allocation, the remaining bidders will receive their bid amounts as refunds. 

 8. Listing in Stock Exchanges 

This is the last stage of the IPO process. After receiving IPO shares in investors' Demat accounts, the business will list these shares on the relevant stock markets. These shares are now accessible for trading or holding by any investor. 

Importance of IPO  

The IPO serves various functions in the financial ecosystem for companies and investors. 

1. Raising Capital for Growth: Companies raise funds through IPOs to support their business activities. This capital can be used for research and development efforts. It may also be allocated towards hiring new staff and developing infrastructure. 
2. Building Brand Visibility: An IPO brings increased public awareness to the company. The listing process generates media coverage and market attention. This visibility can help the company reach potential customers and business partners. 
3. Providing Liquidity to Early Investors: Founders gain the opportunity to liquidate portions of their holdings after an IPO. Venture capitalists who invested early can exit and realise returns. Employees holding stock options also get the chance to sell their shares in the open market. 
4. Establishing Market Credibility: Public listing changes how the market views a company. The IPO process requires financial disclosure and adherence to governance standards. This transparency can influence the company's reputation and market valuation. 
5. Enabling Future Fundraising: Listed companies have access to additional funding mechanisms. They can consider follow-on public offerings when expansion requires more capital. The established market presence creates pathways for various future capital-raising activities. 

Conclusion 

The IPO cycle involves multiple stages from hiring investment bankers to listing shares on stock exchanges. Companies raise capital, gain market visibility, and provide liquidity to early investors through this process. The cycle includes DRHP preparation, SEBI approval, marketing, price setting, and share allotment. Whilst IPOs offer advantages like capital infusion and enhanced credibility, they also involve costs and time commitments. Investors can track and participate in IPO opportunities through a stock market trading app for convenient access to public offerings.