How IPO Works?

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When a company looks to go public, it basically implies that it is ready to give away some part of its stake to external participants. These external participants can be other corporate institutions, business entities or retail investors. Most of the times, these external outings are done for the first time and that is why it is called an Initial Public Offering or IPO.

With IPO, the company gets converted from private company to a public company. In simpler terms, once the company becomes a public one, it is liable to publish information on its financials, cash flows, profit or loss details in the public domain, generally on a quarter and yearly basis.

Let’s understand how IPO Works in the most simple way possible:

First and foremost, the business needs to hire a team of expert underwriters, lawyers, financial accountants etc. in order to get assistance in the overall IPO filing and execution process. This team plays a big role in the overall process development where it registers, files, documents different steps with SEBI. SEBI or Securities and Exchange Board of India is the top regulatory body of Indian Stock Market space.

Secondly, the business needs to draft a registration document and then provide it to SEBI. This document includes multiple aspects such as:

  • Industry Summary
  • Business Summary
  • Objectives of the Offer
  • Capital Structure
  • Financial Statements
  • Plans on Funding Utilization
  • Management discussion
  • Outstanding litigation
  • more.

SEBI reviews all the details mentioned in the registration document with a close view. Either the regulatory body approves the document as it is, assuming everything mentioned is in line with the requirements. Otherwise, SEBI can pass few comments/remarks on specific areas of the document.

Once the comments are received, the company and its underwriter team sits back and reworks on the areas that are highlighted.

SEBI reviews the updated document again and passes only when the complete information in the document goes with the stipulated requirements. As part of the complete IPO Process, the company then files the DRHS document with the regulator.

Thirdly, moving on the company goes around the country and meet potential investors. In fact, they also provide an opportunity to a set of investors to actually buy shares of the company at a pre-set price. The idea of this particular exercise is to create a fuss, an environment in the country about this upcoming issue. Furthermore, it also works as a research exercise to get a feel among the investor community about this IPO.

Next up, in the fourth step, the company sets the price band of the IPO which is one of the most crucial steps in the overall process. This can make or break the deal. The price must be kept in such a way that the demand of shares stays relatively high than the actual supply of these shares in the primary market. For the detailed understanding, you can check different pricing types of IPOs.

Finally, the business needs to time the IPO well. Like before a movie hits the box-office, the timing of the release is important. The producer and the director of the movie make sure that there is minimal or no collision with any other big movie releasing around those days. This can help their movie to get the maximum revenue possible.

In a similar way, the timing of the IPO is important too. The business needs to make sure that the overall industry eco-system is conducive to the IPO launch, the overall business momentum is positive and no doubt the company itself is going through a growth phase. Furthermore, there are no big IPOs hitting the stock market anytime close to this IPO’s release.

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