Last Updated on December 4, 2023 by BFSLTeam BFSLTeam
An Initial Public Offering (IPO) allows a private company to become publicly traded, allowing it to raise funds and obtain liquidity by offering shares to public investors. In India, companies have to comply with various regulations and guidelines provided by the Securities and Exchange Board of India (SEBI) and stock exchanges. This makes the whole IPO process complex and time-consuming. Find out how this whole process works.
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What Is the Procedure for Initial Public Offerings in India?
The IPO process in India involves 6 to 7 steps and takes about 4 to 6 weeks to complete. Here are the steps involved:
Step 1: Hiring an Underwriter
A company has to hire financial experts who can carry out the IPO process on its behalf. Underwriters work as an intermediary between investors and an IPO issuing company. An underwriting agreement is signed which details the offer and risks that underwriters need to take.
Step 2: SEBI Registration
First, the issuing company has to work together with its underwriters to create an important document known as a Red Herring Prospectus (RHP). This comprehensive resource required under Section 32 of the Companies Act is essential for retail investors evaluating an offer.
First, the company must submit a Draft Red Herring Prospectus (DRHP) to SEBI to get its approval. Then, it needs to submit a finalised RHP to the Registrar of Companies (RoC) three days before the public offer is launched. It contains detailed information about the company, except for specific share prices or quantities.
It reflects a company’s commitments regarding its prospectus, with any differences requiring the approval of regulators such as SEBI and RoC. After the closing of an IPO, a final prospectus containing the allotted shares and closing prices must be submitted to both RoC and SEBI.
An RHP remains an essential tool for issuers and underwriters to market IPOs and it is the primary resource for retail investors that consolidates essential information mandated by SEBI and the Companies Act. It includes these details:
- Definitions: This section clarifies key industry-specific terms and concepts.
- Risk Factors: This segment recognises the inherent uncertainties in any business and identifies potential internal risks as well as external threats.
- Use of Proceeds: This section informs investors about the allocation of funds raised through an IPO. It offers insight into a company’s future direction and financial management.
- Industry Description: This section provides forecasts and insights into the broader industry environment in which the company operates.
- Business Description: This segment deals with the main activities of a company and explains how it generates profits. Investors will examine this section to understand the nature of their potential ownership.
- Management: Details of promoters, directors and key managers are given here. Since investors often see their investment as a bet on the competence of the management team, considerable attention is paid to this part.
- Financial Details: This section includes auditor’s reports and financial statements for the past three to five years to provide key financial insights to potential investors.
- Legal and Other Information: Any ongoing lawsuits related to a company, organisers or directors that have not been resolved are listed here, ensuring transparency of legal matters.
Additional Read: Upcoming IPO in December 2023
Step 3: Cool-Off Period
This is when SEBI looks into the details provided by a company in its draft prospectus. It checks if there is any discrepancy or if there needs to be any modification. After SEBI approves this document, the company can set a date for its IPO.
Step 4: Sending Applications to the Stock Exchanges
After approval, the company has to send an application to the stock exchange for the listing process. If a company wants to be listed on both the NSE and BSE, it must get approval from both stock exchanges.
Step 5: Launching the IPO
Companies aim to turn their IPO into a major event, similar to blockbuster movies or blockbuster productions. Achieving this goal involves holding IPO roadshows where underwriters travel around the target markets to showcase their offering.
These roadshows take place well in advance of the IPO date, giving investors time to decide. After regulatory approval, an IPO date is set and a financial prospectus is published. Roadshows serve to convince investors by presenting the company’s growth prospects and expected market share.
Teams collaborate with analysts and fund managers to gather valuable insights. Through multimedia presentations and question-and-answer discussions, company executives share comprehensive details about the upcoming IPO. In addition, some companies hold online roadshows for the public, and smaller investor meetings may be held before the IPO.
Step 6: Pricing the IPO
There are two types of IPOs: a fixed-price issue and a book-building issue.
In a fixed-price issue, shares are sold at a predetermined price. In contrast, a book-built issue allows investors to bid within a 20% price spread, with the final price determined after the offer closes.
Issuers prefer book-building IPOs because they allow for better price discovery. The final price, known as the cut-off price, is determined based on the maximum value of the shares based on market demand. The price is influenced by factors such as the target capital and market demand for the shares.
After the issue price is set, stakeholders and underwriters work together to allocate shares to investors, usually in full unless the IPO is oversubscribed. Allotted shares are credited to the demat accounts of investors; refunds are paid to investors who did not get shares for an oversubscribed IPO.
Insiders are prohibited from trading to prevent stock price manipulation. Bidders will be allocated within 10 days of the bid deadline.
In the event of oversubscription, shares are distributed proportionately; for example, a request for 10,000,000 shares in a 5X oversubscribed IPO would result in only 2,000,000 shares being allotted. After allotment is completed, the listing process takes place allowing IPO investors to sell shares in the stock market.
Also Read: Pre-IPO Investing
Summary
Share prices will fluctuate after the IPO closes and the shares trade in the secondary market. SEBI regulations mandate a lock-in period for both promoters and non-promoters. After these periods, there may be a temporary decline in stock prices. Now that you know how this IPO process works, you can make better investment decisions.
Frequently Asked Questions
The IPO process in India takes around 4 to 6 months including all the steps.
The IPO price is determined either by the book-building method or by the fixed-price IPO method. Underwriters or investment bankers assess investor demand to determine the price.
Security and Exchange Board of India (SEBI) controls the entire IPO process in India.
SEBI has introduced rules to ensure transparency in IPOs. Shareholders with more than 20% before the issue can only sell 50%, and those with less than 20% can sell up to 10% of their stakes. These regulations protect the interests of investors and companies.
In India, a company launching an IPO must meet specific criteria, including three years of existence, two years of profits, a net worth of Rs. 3 crore and a minimum float of 20%. In addition, they must meet financial and legal requirements such as audit of financial statements by a SEBI-registered trader.
