The IPO Process: The Need for Public Issues
- What is an IPO?
- The need for Public Issues
- Types of IPO
- The IPO process – 12 steps from issue to listing
What is an IPO?
An Initial Public Offer (IPO) is the first time an unlisted company offers its shares to the public. Once the shares are subscribed and listed on the stock exchanges, the company becomes publicly traded.
For a business aiming to grow beyond its initial capacity, personal capital or small-scale private investments may not suffice. This is where an IPO steps in — unlocking access to a vast pool of capital from both individual and institutional investors in the primary market.
From an economic perspective, IPOs help channel household savings into productive investments, thereby contributing to GDP growth. They also create transparency and market discipline for the issuing company.
Why Do Companies Need to Go Public?
A company chooses to go public when it needs significant funding for expansion, R&D, acquisitions, or even debt repayment. By offering equity in the open market, businesses tap into a broader investor base while allowing early-stage investors an exit route.
To access this market, a company must get approval from SEBI (Securities and Exchange Board of India) and follow a stringent IPO process. Only after rigorous checks and due diligence can the public participate confidently.
Types of IPO Issues
Companies can raise capital in different ways through the primary market:
Initial Public Offer (IPO): The first public issue of an unlisted company.
Further Public Offer (FPO): A public issue by a company already listed on an exchange.
Offer for Sale (OFS): Early investors like VCs or private equity firms sell their stake to the public.
Rights Issue: Offered exclusively to existing shareholders to raise additional capital.
ADRs/GDRs/IDRs:
ADRs (American Depository Receipts): Indian firms raising capital in the US.
GDRs (Global Depository Receipts): Indian firms raising capital in international markets outside the US.
IDRs (Indian Depository Receipts): Foreign companies raising funds and listing on Indian exchanges.
The IPO Process in India – 12 Steps from Issue to Listing
Step 1: Appointing a Merchant Banker
The IPO journey begins with appointing a SEBI-registered merchant banker, who acts as a financial advisor and ensures regulatory compliance. They are responsible for drafting offer documents and promoting the issue.
Step 2: Drafting the Offer Document
This key document details company information — business model, financials, promoter background, and the purpose of the IPO. It’s crucial for investor transparency.
Step 3: Filing the Draft Red Herring Prospectus (DRHP)
The DRHP is filed with SEBI for review. This version does not include the price or number of shares. It's made public for feedback and scrutiny.
Step 4: Public Announcement
The company publishes ads in English, Hindi, and regional newspapers announcing the DRHP filing. This invites objections or feedback from the public and ensures transparency.
Step 5: SEBI Review
SEBI evaluates the DRHP for adequate disclosures and may offer observations. It doesn’t "approve" or "endorse" the issue but ensures investor interests are protected.
Step 6: Filing Final Offer Document
After incorporating SEBI’s feedback, the Red Herring Prospectus (RHP) is filed with SEBI, stock exchanges, and ROC. This final version includes the IPO dates, price band, and financial details.
Step 7: Opening the IPO
The IPO is announced with all key details — subscription dates, bidding procedure, and price band. The issue remains open for a minimum of 3 working days and up to 10 days.
Step 8: Bidding for Shares
The book-building process determines the IPO price. Investors can bid within a specified price band. Those who bid below the cut-off price won’t receive allotments. Bidding at the cut-off price gives you a better chance of receiving shares.
Step 9: Application Processing
Post bidding, the registrar to the issue processes all applications, including fund blocks, verifications, and rejections.
Step 10: Basis of Allotment Finalised
The registrar and merchant banker decide the basis of allotment, which is then approved by the exchange and shared with the public. This typically takes five working days post-issue closure.
Step 11: Share Allotment
Successful bidders receive shares in their demat accounts, while others receive refunds. Funds are unblocked, and equity shares are distributed.
Step 12: Listing on Stock Exchange
Within six days of successful bidding, the company's shares are officially listed on stock exchanges. From this point on, the shares are freely traded in the secondary market.
Points to Remember
IPOs help companies tap into a larger pool of funds and enhance public trust.
The process involves stringent checks to ensure transparency for investors.
The IPO journey concludes with the listing of shares, enabling public trading.
With the rise of platforms like m.Stock, investing in IPOs is now easier and more accessible than ever.