Step-by-Step Guide to the IPO Process in India

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. 

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. 

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.