IPO Process these days has become completely streamlined with a set order and number of steps a business needs to take. It involves a need for external parties that assist a business to carry out the complete IPO process for them.
Let’s break down the complete process in this detailed review and try to explain in the easiest way possible.
When a company is looking to raise huge funds for different business reasons (such as geographic expansion, build infrastructure, complete projects etc) then it may choose to sell part of its shares in exchange of money from the general public. This company must be aware of different advantages of IPO as well as disadvantages of IPO before placing their feet into this space.
Although the whole IPO process is very streamlined and structured, it can certainly be very excruciating for the company that is going to get listed on the stock market. The whole process is looked over by the top regulatory body in the Indian stock trading space, SEBI or Securities and Exchange Board of India.
IPO Process in India
In this detailed IPO Process walkthrough, we will talk about the specific steps involved in the overall procedure along with discussing the specific parties needed in each step.
Here is a quick summary of the steps that we are going to explain at length later:
Hire an Investment Bank
File with SEBI
Get Started with DRHP
Hit the Road!
Open to Investors
Credit the Shares to Bidders
To make the reading relatively interesting, we will take an example of let’s say company ADB who is into manufacturing of Sports Shoes. The business has 2 manufacturing units in Uttar Pradesh. They sell their products through domestic distributors and at the same time, export it to a few brands in Europe as well.
Now, they are looking to add 3 more manufacturing plants, 2 in West Bengal, 1 in Bihar. They need a capital of ₹400 Crore for the complete setup and that is why they are looking to raise this funding from the public by an IPO.
The IPO process in India is not that different from what it is in the rest of the world. Since, the Indian stock market is regulated by SEBI with some prominent exchanges such as NSE, BSE – businesses that are looking to go public can certainly rely on the IPO process that is laid out by such bodies.
Here are the steps your business will need to go through:
#1 Hire an Investment Bank
Like any other company that is looking to raise public funding, ADB hires a team of underwriters and investment bankers from HDFC securities & Karvy Online to manage their IPO. This team is going to perform some checks such as looking into the financial performance of the company.
This will include looking to balance sheets, Profit and Loss statements, cash flow statements etc of the company ADB over the last few years.
The team will then sign an underwriting agreement that will contain details such as the amount to be raised, number of securities at stake. They will also be working with the ADB team to understand aspects such as the retail allocation of the IPO and then bifurcation of institutional allocation, exchanges the business looking to get listed in and so on.
The team from HDFC & Karvy (or any investment bankers hired) will focus on making sure that the business actually gets the funding that it is looking to raise, however, they will not be any written commitments from any banker.
#2 File with SEBI
This is the first test ADB needs to go through in the complete IPO process. Here the underwriters discussed in step 1 file the registration application readied by them with SEBI, the regulatory body of the Indian Stock Market.
This registration application contains information on business fiscal data, business plans of the company, information on how the business is looking to spend the funding raised etc.
It is the responsibility of the underwriter team that all aspects mentioned in the application are in line with the requirements set by SEBI. In case it is, then the team can go ahead with the next step.
Otherwise, SEBI will mention a few comments on the application which need to be fixed by the team of ADB along with the hired underwriters before filing the application again.
#3 Get started with DRHP
This step is like testing waters for the underwriting team around the IPO. The hired team of HDFC & Karvy will present an initial prospectus which contains information on the potential price per share (or the issue price of the IPO).
The document shared in this step is called Draft the Red Herring document as this is a draft version and not a finalized document by any means.
With the kind of feedback received for DRHP, the underwriting team decides to stay with the price or goes back to the drawing team if required.
#4 Road Shows
It’s time to disco!
Well, the team goes out in the public domain, holds road shows, meets potential investors (generally institutional in nature) in this particular step.
This 2-week program will require the team to show numbers, provide answers to how, why and whats by the potential investors and can be an excruciating exercise. This experience gives the team a first-hand idea of what kind of expectations they can keep when the IPO actually opens up for the public bidding.
This activity can be seen as an exhaustive marketing event where the company and its respective agencies MUST go full-throttle in terms of bringing the word out. Investors at institutional, anchor, retail, high net-worth levels must be aware of this upcoming IPO.
#5 IPO Pricing
This is the make-or-break step in the overall IPO process. In this particular step, the complete team gets together again to set up a price or an NSE price band for the IPO (depending on the type of the IPO company plans to launch) on which the IPO will be opened up for public investor bidding.
Not only that, in this particular step, the number of shares to be opened for public bidding is decided along with the decision of the exchange(s) where the stock will be finally listed.
Now, the decision on the bidding price and the number of shares is definitely one of the biggest decisions to be made. If the bid price is higher than the customer expectations, then the risk of under-subscription jumps up. At the same time, in case it is under-priced, then the business loses out on an opportunity to raise an even bigger amount through this IPO.
IPO Process Infographic
Here is a quick IPO process flow chart for your reference:
#6 Avail it to Investors
Like a movie hits the box office on a Friday, an IPO is opened up for public bidding on a set date. In fact, there is a complete calendar released that has information on dates of:
Shares crediting into the Demat Account(s) of the winning bidders
Stock Listing on the exchange(s)
Generally, bidders are provided with a window of 3 to 5 days in case they are looking to bid for an IPO. There are multiple ways that you can bid an IPO by. ASBA is one of the most prevalent methodologies of IPO applications these days since it is completely online and convenient to the investor.
At the same time, you have the option to place your IPO bid in an offline way as well. However, it is quite cumbersome and requires manual effort.
#7 Credit the Shares to winning bids
This is the climax of the whole IPO process where the business team of ADB and the hired underwriters finalize the complete list of investors who bag the shares. Most of the process is online and done through automated systems, however, the parameters are set by this team itself.
For the bidders who are successfully able to get shares, are provided with these stocks in their respective Demat account as per the timeline shared initially.
However, for the bigger set of people who do any get any subscription are flagged by the team and their bid amount is credited back to their trading account or the blocked amount in their bank accounts is unblocked (in case they are using ASBA).
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