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.
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.
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.
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.
Here, the price of the IPO is determined.
Companies generally employ the following methods to decide on their IPO’s pricing:
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
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.
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.
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.
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.
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.