Initial Public Offering Process

While potentially riskier, market-linked investment schemes are a great way to generate wealth and access capital appreciation. Investments in the capital market are generally categorised into two segments, primary market and secondary market.

 

The secondary market is where second-hand securities are sold and purchased. On the other hand, the primary market facilitates newly listed companies to sell their securities. This takes place in the form of an Initial Public Offering (IPO), rights issue, or private placement.

 

The initiation of the IPO process is generally considered a landmark in a corporate’s growth story. This is due to the fact that it allows them to access funds from the public capital market. It also helps them in establishing a business’ credibility and authenticity. 

The process of IPO in India builds a direct relationship between a business and investors by making the former shareholders in the latter. Moreover, investors can exit these investment avenues via the secondary market. However, to participate in an IPO, it’s crucial that individuals own a Demat account.

Here are the IPO process steps in India, with which companies can get listed in the public capital market and raise funds. However, prior to these steps, they must consider the criteria set for eligibility to apply for an IPO. 

Step 1: Taking an Investment Bank On Board

• The first stage in the IPO process steps is hiring an investment bank or a team of underwriters. They help companies prepare for the IPO by analysing their financial health, assets, and liabilities.  

• The underwriters also assist companies in determining the IPO pricing, the type of securities to be offered, and the right time for the launch.

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

• Companies must then file a Draft Red Herring Prospectus (RHP) and registration statement with the local Registrar of Companies (ROC). RHP is a document that contains all the details about the company’s financials.

• Companies must also submit registration statements per the Companies Act of 2013.

• The SEBI will then scrutinise the details in the Draft RHP and registration statement before registering a company’s IPO.

Step 3: Build Relationships with Potential Investors via Roadshows 

• This step mostly involves the marketing and advertising strategies to create a buzz about the upcoming IPO among potential investors.

• It involves a fast-moving two weeks when the executives and staff of a company travel the length and breadth of the country to promote their IPO. 

• HNIs and institutional investors alike may be potential investors to whom the company pitches their IPO.      

Step 4: Pricing of IPO

• Here, the price of the IPO is determined.

• Companies generally employ the following methods to decide on their IPO’s pricing:

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

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

  3. IPO Floor Price: The company announces a minimum bidding price

  4. 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, with assistance from underwriters, determine the volume of securities to be allotted to each investor.

• In case of oversubscription, partial allotment is made to the investors. 

 

A large number of IPOs have been listed in recent years and are growing considerably on a year-to-year basis. In fact, many of these IPOs are trading at higher rates than their issued price, some even trading at almost 400% higher rates than their initial prices.

 

This makes an Initial Public Offering an attractive investment option for many. However, many anticipated IPOs have also tanked as soon as they were listed in the market. So, you must understand that IPO investment involves a fair amount of risk, like stock trading. 

 

Hence, assess your risk potential and follow due diligence before investing in an IPO. This includes doing your research on a company’s USP, financial health, competitors, management and use of IPO funds.