As an investor, if you want to invest in equities, you will also look for opportunities in upcoming IPOs. But do you know the IPO Process in India? It is essential to know the IPO process, which will help you enhance your knowledge.
Why is IPO Process?
Through an Initial Public Offering (IPO), a company changes from a privately held entity to a publicly traded one. The companies raise money through IPO, giving them access to market liquidity by offering stock/shares to the public. However, companies have to abide by the IPO process in India before their shares are available for trading publicly. This is a complicated process by stock exchanges under the regulation of SEBI.
What are the Steps in the IPO Allotment Process?
Step1: Hiring an Underwriter or Investment Bank
To start the IPO process in India, the company seeks help from a team of underwriters or investment banks. Mostly, companies prefer taking services from more than one bank. The team will study the company’s financial position, assets and liabilities and then plan to cater to its financial needs. The underwriters act as an intermediary between the company and its investors. Finally, an underwriting agreement will be signed, which contains the following components –
- Details of the deal
- Amount to raise for the issue
- Details of securities to issue
Step 2: Registration of IPO
The company and the underwriters file a registration statement together, which comprises the company’s fiscal data and business plans. It also mentions how the company will utilise the fund raised from the IPO.
Along with the registration statement, the company also submits a draft prospectus which is mandatory as per the Companies Act. This is also known as Red Herring Prospectus(RHP). This prospectus comprises all compulsory disclosures by SEBI and the Companies Act. The following are the key components of RHP:
- Definitions: It contains an explanation of industry-specific terms.
- Risk Factors: It discloses the possibilities that can impact the company’s finances.
- Use of Proceeds: It discloses how the company will use the money raised from investors.
- Industry Description: This section explains the working of the company in the particular industry segment. For instance, if the company belongs to the consumption sector, this section will provide forecasts and predictions about this sector.
- Business Description: This section contains the core business activities of the company.
- Management: This section discloses information about key management people.
- Financial Description: This section provides financial statements and the auditor’s report.
- Legal and Other Information: This section provides the litigation against the company along with required other information.
The underwriters submit the document to the Registrar of Companies(ROC). The officials ensure that the company discloses every detail that a potential investor should know. If the registration statement is compliant with the set rules by SEC, it gets a green signal. Otherwise, ROC will send back with comments. The company should work on the comments and file for registration again. Finally, after submission, the company can make an application for IPO to SEBI.
Recommended Read: What is Draft Red Herring Prospectus?
Step 3: Verification by SEBI
The market regulator, SEBI, verifies the disclosure of facts by the company. The company can announce the date of its IPO, after the application gets the approval.
Step 4: Application to Stock Exchange
The company has to make an application to the stock exchange for floating its initial issue.
Step 5: Creating IPO Buzz through Roadshows
Before an IPO opens for subscription to the public, the company aims to create a buzz in the market through roadshows. The company executives will advertise the upcoming IPO across the country for two weeks. It includes marketing and advertising tactics to attract potential investors. Also, the company shares the key facts and figures with various people like business analysts, fund managers, etc. Furthermore, they adopt different user-friendly methods like question and answer sessions, group meetings, multimedia presentations, online virtual roadshows and many more.
Step 6: Deciding the IPO Price
The company initiates the pricing of the IPO either through a fixed price IPO or a bookbinding offering. In a fixed price offer, the company announces its stock price in advance. While in bookbinding offering, the company announces a 20% price range, following which the investors place their bids within the price bracket. Also, during the bidding process, the investors have to place their bids as per the company’s lot price, i.e. the minimum number of shares to purchase.
At the same time, the company also provides the IPO floor price and IPO cap price, which are the minimum bid price and maximum bid price, respectively. Typically, the subscription period is open for three to five working days. Therefore, investors can avail the opportunity where they can apply for the IPO through designated banks and brokerage firms. Once the details are filled in, they can submit a cheque or do an online transfer to register for the IPO.
After the bidding process is completed, the company will determine the cut-off price. This is the final price at which the company will sell its stocks.
Step 7: Allotment Process
Once the company finalises the IPO price, the underwriters and stakeholders decide how many shares each investor will receive. Investors will receive total securities unless the IPO is oversubscribed. The shares will directly credit to the linked demat account. However, a refund is given if shares are oversubscribed. The stocks will be allotted to the investors within ten working days from the last bidding date. Finally, on the IPO listing date, the stock market will start trading the company’s IPO.
Check Out What is IPO Listing?
Factors to Consider Before IPO Process is Complete
Any company aims to prevent the company insiders or internal investors from participating in the IPO process. You should know that insiders trading their own shares can disrupt the demand and supply balance. Also, there are measures to protect retail investors from manipulated offer prices. It prevents fraudulent company officials from passing on the overpriced stocks at the cost of general investors. Also, this measure helps to protect the additional selling pressure from inside. Finally, this sustains the market price of the shares.
Since you know the IPO process in India and its importance, it can help you make informed decisions while investing in any upcoming IPO. Also, it would help you select the proper stockbroking firm that provides you multiple benefits with a demat account.