What is IPO Cycle?

What is IPO Cycle?

An IPO (Initial Public Offering) is a public sale in which firm shares are offered to investors. IPOs are often performed by firms seeking to generate cash and provide a means for organisations to transition from private to publicly traded. When a corporation goes public, its shares become available for purchase and sale on the open market.

However, launching an IPO is a multi-day procedure. To launch an IPO, a firm must follow a certain IPO cycle that begins with preparing the Draft Red Herring Prospectus (DRHP) with the assistance of an underwriter and ends with the stock being listed on the stock markets. If you are a new investor unfamiliar with the phrase IPO, this blog is for you. Continue reading to gain a thorough grasp of the IPO and IPO cycle. 

Understanding the IPO Cycle?

The first step is filing a Draft Red Herring Prospectus with the Securities Exchange Board of India. It is the process by which a company goes public; it raises money through an Initial Public Offering (IPO). The final step is to price the IPO and list it on stock exchanges. 

IPOs can be risky as there is often a lot of hype surrounding them, and it can be challenging to know if a company is truly worth its valuation. However, they can also offer investors the chance to get in on the ground floor of a potentially successful company.

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Table of Content

  1. Understanding the IPO Cycle?
  2. Different Stages of the IPO Cycle?
  3. Benefits of Going through an IPO Cycle?
  4. Drawbacks of Going through an IPO Cycle?

Different Stages of the IPO Cycle?

The following points will guide you through 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 major 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 includes 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 must build excitement among retail investors after opting to conduct 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 offering. 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 is decided by underwriters 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 IPO price range and lot size are determined by the firm and reported 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.

  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. Following the receipt of 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.

Benefits of Going through an IPO Cycle?

Benefits include increased capital, visibility, and liquidity.

  • An IPO's key benefit is that it raises funds. Companies can generate enormous quantities of money by selling stock to the general public to support operations and expansion. This capital influx may help a firm grow, produce new goods, and recruit new personnel.
  • An IPO boosts a company's visibility. Going public helps a company's brand gain publicity and name recognition. This greater visibility may entice new clients and partners.
  • Finally, an IPO increases liquidity for stockholders. This liquidity enables shareholders to pay out their investments when needed or desired. After a corporation becomes public, its stock may be purchased and sold on the open market. 

Drawbacks of Going through an IPO Cycle?

Despite the positives, there are several pitfalls that firms should be aware of before deciding to participate in the Indian IPO process. 

  • One of the major disadvantages is the expense. Companies must spend a significant amount of money to list their shares on a stock market, as well as continuing expenses such as compliance and audit fees.
  • Furthermore, corporations may need to recruit more employees to deal with the heightened public scrutiny of being a publicly traded company. 
  • Another possible disadvantage is the time requirement. 

The IPO cycle is a lengthy and complex procedure that allows firms to become publicly listed. While it may be expensive and time-consuming, it is worthwhile for businesses aiming to enter public markets. An IPO benefits shareholders by generating cash, enhancing visibility, and providing liquidity. However, it may be difficult and costly and put a corporation under pressure to deliver. Furthermore, there is a danger that the stock price may not match expectations, making it a hazardous investment for firms that are not expanding or profitable. Utilizing a reliable stock market app can assist in tracking investments and market trends in such scenarios.

FAQs on the IPO Cycle

Securities and Exchange Board of India (SEBI) regulates the IPO cycle in India, overseeing the entire process and ensuring compliance with regulations.

The first step is drafting a draft red herring prospectus (DRHP), which provides essential information about the company intending to go public.

An example is Paytm's IPO in November 2021, where it filed its DRHP, conducted roadshows, set an issue price, and ultimately listed on the stock exchange.

The IPO principle involves a company offering its shares to the public for the first time, raising capital by selling ownership stakes in the form of stocks.

A Shelf Prospectus is a document allowing a company to issue securities multiple times within a specified period without issuing a fresh prospectus each time.