IPO Process in India
IPO Process in India
As an investor, you must have endeavored to find
a suitable opportunity for investing in IPOs. But do you know about the initial
public offering process? Well, knowing about the IPO process in India will
certainly enhance your knowledge. Read on to know more.
Understanding The Need
For IPO Process
A company can change itself from a
privately-held body to a publicly-traded entity through the process of Initial
Public Offering (IPO). Typically, companies offer IPO to
raise money and get access to liquidity by offering their stocks/shares to the
public. Companies have to abide by the IPO process in India - as stipulated by
stock exchanges - before its shares are eligible to be publicly traded. This
process is often complicated and long-drawn.
IPO Process Steps:
Step 1: Hiring Of An Underwriter Or Investment Bank
To start the initial public offering process,
the company will take the help of financial experts, like investment banks. The
underwriters assure the company about the capital being raised and act as
intermediaries between the company and its investors. The experts will also
study the crucial financial parameters of the company and sign an underwriting
agreement. The underwriting agreement will usually have the following
components:
·
Details of the deal
·
Amount to be raised
·
Details of securities being issued
Step 2: Registration For IPO
This IPO step involves the preparation of a
registration statement along with the draft prospectus, also known as Red
Herring Prospectus (RHP). Submission of RHP is mandatory, as per the Companies
Act. This document comprises all the compulsory disclosures as per the SEBI and
Companies Act. Here’s a look at the key components of RHP:
·
Definitions: It
contains the definitions of the industry-specific terms.
·
Risk
Factors: This section discloses the possibilities that
could impact a company’s finances.
·
Use
of Proceeds: This section discloses how the money raised from
investors will be used.
·
Industry
Description: This section details the working of the company
in the overall industry segment. For instance, if the company belongs to the IT
segment, the section will provide forecasts and predictions about the segment.
·
Business
Description: This section will detail the core business
activities of the company.
·
Management: This
section provides information about key management personnel.
·
Financial
Description: This section comprises financial statements
along with the auditor's report.
·
Legal
and Other Information: This section details the litigation against the
company along with miscellaneous information.
This document has to be submitted to the
registrar of companies, three days before the offer opens to the public for
bidding. Alongside, the submitted registration statement has to be compliant
with the SEC rules. Post-submission, the company can make an application for an
IPO to SEBI.
Step 3: Verification by SEBI:
Market regulator, SEBI then verifies the
disclosure of facts by the company. If the application is approved, the company
can announce a date for its IPO.
Step 4: Making An Application To The Stock Exchange
The company now has to make an application to
the stock exchange for floating its initial issue.
Step 5: Creating a Buzz By Roadshows
Before an IPO opens to the public, the company
endeavors to create a buzz in the market by roadshows. Over a period of two
weeks, the executives and staff of the company will advertise the impending IPO
across the country. This is basically a marketing and advertising tactic to
attract potential investors. The key highlights of the company are shared with
various people, including business analysts and fund managers. The executives
adopt various user-friendly measures, like Question and Answer sessions,
multimedia presentations, group meetings, online virtual roadshows, and so on.
Step 6: Pricing of IPO
The company can now initiate pricing of IPO
either through Fixed Price IPO or by Book Binding Offering. In the case of
Fixed Price Offering, the price of the company’s stocks is announced in
advance. In the event of Book Binding Offering, a price range of 20% is
announced, following which investors can place their bids within the price
bracket. For the bidding process, the investors have to place their bids as per
the company’s quoted Lot price, which is the minimum number of shares to be
purchased. Alongside, the company also provides for IPO Floor Price, which is
the minimum bid price and IPO Cap Price, which is the highest bidding price.
The booking is typically open from three to five working days and investors can
avail the opportunity of revising their bids within the stipulated time. After
completion of the bidding process, the company will determine the Cut-Off
price, which is the final price at which the issue will be sold.
Step 7: Allotment of Shares
Once the IPO price is finalised, the company
along with the underwriters will determine the number of shares to be allotted
to each investor. In the case of over-subscription, partial allotments will be
made. The IPO stocks are usually allotted to the bidders within 10 working days
of the last bidding date.
Other Factors That The
Company Consider Before The Initial Public Offering Process Is Complete:
Yes, any company will endeavour to prevent company
insiders or internal investors from participating in the IPO process. Remember,
company insiders trading in their own shares can disrupt the demand and supply
balance. Not only does this measure protect retail investors from manipulated
offer prices but also prevents fraudulent company officials to fob off
overpriced stocks at the expense of general investors. This measure also helps
to fend off additional selling pressure from inside, and thus sustain the
market price of shares.
Conclusion
Now that you know the IPO process steps and its
importance, you can make informed decisions to invest in IPOs. To make prudent
investment decisions, you will be invariably required to do a lot of legwork.
This includes selecting a trusted and reliable financial partner. You must
select a stockbroking firm providing multiple benefits such as smooth trading
platforms, an all-in-one account to trade in all investment options, zero Demat account opening and AMC charges,
award-winning research, and so on
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