What is the IPO Process in India?

It is through the Initial Public Offering (IPO) process that a private enterprise becomes a public company by offering its shares to the public for the first time. As you can imagine, it is a very important process for the company as it allows it to raise funds for its growth and expansion. Apart from this, going public comes with additional benefits such as access to higher capital, increased liquidity, enhanced reputation and credibility, and access to a broader pool of investors. Additionally, public companies can use their stock as currency for acquisitions, which can help to facilitate growth and expansion.

The Securities and Exchange Board of India (SEBI) is the primary gatekeeper and regulator of the IPO process in India. In this blog post, we will discuss the various steps involved in the initial public offering process.

Step 1: Employing the services of an Investment Banker

The first step in the IPO process is to appoint an investment banker. The investment banking firm helps the company in the following ways:-

• Preparing the company for the IPO process:

  The investment banker conducts a thorough analysis of the company's financials, identifies the risks and opportunities in the proposal, and helps prepare the IPO prospectus.

• Determining the offer price:

  The investment banker also helps the company to determine the offer price of the shares to be issued in the IPO allotment process. This is achieved by conducting a thorough analysis of the market, the company's financials, and the demand for the shares.

• Underwriting the shares:

  Finally, the investment banker carries out underwriting tasks for the shares to be issued through the IPO allotment process and guarantees the purchase of the shares in case there is a shortfall in demand.

Step 2: Due Diligence

Due diligence is the next step in the IPO process. It is the process of investigating and verifying the accuracy of the company's financial and other information. This is undertaken by the hired investment banker and the company's legal and financial advisors. The due diligence process, typically, includes the following:-

• Reviewing the financial statements:

  The investment banker reviews the company's financial statements, including the balance sheet, income statement, and cash flow statement.

• Analysing the industry:

  The investment banker also analyses the industry in which the company operates, including the competition, market size, and growth potential.

• Examining legal and regulatory compliance:

  The legal and financial advisors examine the company's compliance with all legal and regulatory requirements.

Step 3: Drafting the Prospectus

The company is expected to provide all the pertinent information about its finances and operations to its potential investors through the means of a Draft Red Herring Prospectus (DRHP). Typically, the prospectus includes the following:-

• A brief history of the company and its background.
• A description of the company's business, including the products and services offered, markets served, and its growth prospects.
• The company's financial information, including its revenue, net income, and cash flow.
• An outline of the risks associated with investing in the company.
• All other pertinent details of the IPO, including the number of shares to be issued, the offer price, and the date of the IPO.

Step 4: Approval from SEBI

This DRHP needs to be filed with SEBI with an application to launch the IPO. SEBI will then review the prospectus to ensure that it complies with all the regulatory requirements. Only upon SEBI’s approval can the IPO process proceed further. If SEBI finds any deficiencies in the prospectus, it may ask the company to make changes or provide additional information. Once all regulations are satisfactorily met, the financial prospectus is released for the public’s perusal.

Step 5: Roadshow

Upon SEBI’s approval of the prospectus, companies embark on a roadshow to generate interest and buzz in their IPO offerings. Often, during the roadshow, the company's management team and investment bankers meet with potential investors and present the investment opportunity. The roadshow is an important part of the IPO procedure, as it helps to generate demand and favourable market sentiment in the investor community, which can help drive the price of the offer.

Step 6: Pricing and Allocation

After the roadshow, the investment banker will price the shares and allocate them to investors. The price of the shares is based on various factors, including the demand for the shares, the company's financial performance, and market conditions. The allocation of shares is usually done on a pro-rata basis, which means that each investor will be allocated shares based on the percentage of the total shares they have subscribed for. There are two main ways to set the price for the IPO:-

• Fixed price method:

  A price is fixed based on the aspirations of the company, the target capital to be achieved, and demand in the market.

• Book building method:

  In this method, a price range is decided, and investors are allowed to bid within this range for the ownership of the shares. The final price (also known as the cut-off price) is determined by the share’s actual demand and the biddings received.

Step 7: Listing on the Stock Exchange

The next step in the IPO allotment process is for the company to list its shares on the stock exchange. In India, there are two primary stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The shares are expected to be listed on the stock exchange within six days of the IPO launch.

Formal application forms are released to the public through brokers and authorised trading platforms. Eligible investors can bid for IPOs directly or through intermediaries and wait to receive confirmation if their bid has resulted in the allotment of shares in their names that will be transferred to their demat account in the prescribed time frame. For those who were unsuccessful in their attempt, a refund is credited to their bank account as per the committed time.

Wrapping it up

The IPO process in India is a complex and time-consuming one, but it is an important way for companies to raise capital for growth and expansion. Moreover, it also aims to safeguard the interests of the investors by ensuring that companies provide factual information in their public releases. Companies that successfully complete the IPO process can gain access to a large pool of investors and achieve greater visibility in the market. However, companies must also be prepared to meet the regulatory requirements and maintain good corporate governance practices to succeed in the public markets. Some IPOs come with a lock-in period that may require you to hold on to the stock for a fixed period of time. Investors are advised to carefully research the company’s past and present performance, along with future prospects, before applying for its IPO.