Market-linked investments offer growth potential, but inherent risks always exist. Understanding the two main market categories - Primary and Secondary - is crucial. The Primary Market is where companies go public through an Initial Public Offering (IPO). This significant milestone allows them to raise capital for expansion. 

 

Learning the IPO process empowers both, the companies seeking to go public and investors interested in participating. This knowledge equips you to make informed decisions when investing in IPOs. 

IPO Process

For a company to get listed in the public capital market, it needs to follow the IPO process. This helps them raise the required funds for their expenses. Before listing they must meet certain eligibility criteria for an IPO.

Step 1: Onboarding an Investment Banks

A company initiating an IPO must first hire an investment bank or underwriters. These professionals analyse the company's financial health, including assets and liabilities. They also help determine the IPO pricing and types of securities to offer. They advise on the optimal launch timing.

Step 2: Prepare a Draft Red Herring Prospectus (DRHP) and Register with the SEBI

Companies file a DRHP containing their financial details. They also complete registration with the local Registrar of Companies. They must submit registration statements as per the Companies Act of 2013. SEBI scrutinises the DRHP and registration statement before approving the IPO registration. After SEBI's verification and approval, the company can announce its IPO date.

Step 3: Building a Relationship via Roadshows 

Before the IPO launch, the company must generate investor interest. This is done through targeted marketing and advertising strategies. Company executives and staff engage in extensive promotion efforts. They pitch the IPO to potential investors, including high-net-worth individuals and institutional investors.

Step 4: Pricing of IPO

After completing preliminary formalities, the company determines its IPO pricing. They use one of these methods:

  • Fixed Price IPO: The price of the IPO is fixed in advance 

  • Book Binding Offering: A price range of 20% is announced, and investors can place their bids within this bracket

  • IPO Floor Price: The company announces a minimum bidding price

  • IPO Cap Price: The company announces a maximum bidding price

Step 5: Making IPO Available to the Public and Allot Securities

Once the prices are finalised, companies work with underwriters. They determine the volume of securities to be allotted to each investor. In case of oversubscription, partial allotment is made to the investors. 

IPO Eligibility and Timeline

IPO Eligibility Criteria 

Description

Minimum Paid-up Equity Capital

₹10 Crores

Market Capitalisation

₹25 Crores

Operational Experience

Minimum of 3 years

Company Track Record

The company must have a clean track record and be compliant with all laws 

Public Listing Timeline

T+3 days

Estimated IPO Listing Completion Time

6 to 12 months

Regulatory Changes and Role of SEBI

In August 2023, the Securities and Exchange Board of India announced a change. The timeline for listing IPOs will be reduced from T+6 days to T+3 days. While this change was initially voluntary, it became mandatory from December 2023. This change ensures a swift IPO process. It enables a quick transition from IPO close to stock exchange listing.

 

SEBI ensures market fairness during the IPO listing process. It also protects investors throughout this process. If a company is seeking over ₹50 Lakhs through a public listing, then they must draft an offer document with the regulator. This document will then be reviewed and approved by SEBI. Once verified, an observation letter will be sent by SEBI, which will be valid for three months. It is mandatory for companies to obtain this letter before proceeding with the IPO.

 

While IPOs may offer high returns, some companies can underperform after listing. Similar to stock market trading, IPOs carry inherent risk. Investors should carefully consider their risk tolerance and conduct thorough research before investing. This includes understanding the company's unique selling proposition and past financial performance. You should also examine the competitor landscape and how the company plans to utilise the funds raised through the IPO.

FAQ on the Process of IPO in India

What are the recent regulatory changes in the IPO process in India?

In August 2023, the Securities and Exchange Board of India reduced the timeline for listing IPOs from T+6 to T+3 days. This change in the IPO process in India will be applicable voluntarily from September 2023 and on a mandatory basis from December 2023.

 

It means that IPOs cannot wait for longer than 3 days to list their stocks after the closing date of the issue.

What functions does SEBI perform in the IPO process?

When a company makes a fresh public issue of over ₹50 Lakhs, it needs to file a draft offer document with SEBI to obtain their observations. The company can issue an IPO only after receiving an observation letter from SEBI, valid for three months.

How long does it take to complete the process of IPO in India and issue it in the market?

Currently, the listing of IPO can take T+6 days. However, SEBI has created a mandate to reduce the IPO listing period from T+6 days to T+3 days from December 1, 2023. However, it takes 4-6 months for a company to complete the entire IPO process in India.

Which companies are eligible to offer IPO and raise funds from the public capital market?

To be eligible to participate in the IPO process in India, companies need to have a minimum paid-up equity capital of ₹10 Crores and capitalisation of equities of ₹25 Crores. 

 

Moreover, the company should have complied with the applicable laws before the public listing and should have a minimum experience of 3 years.

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