The process through which a public limited company increases its shareholder base by raising money through the general public and gets itself listed is called an IPO or Initial Public Offering.
The capital raised through the IPO route is used for various purposes like utilising it as growth capital, using it to reduce debt, or for acquiring companies.
Different type of IPO is defined by the way the pricing of the issue is done. There are two ways in which funds can be raised through an IPO – fixed price issue and book-building issue.
Fixed Price Issue – In this type of IPO, the company would set a fixed price at which they want the subscribers to invest in their company. It’s a take it or leave it offer. The advantage is that the company knows the cost of raising money and the investor knows that they will receive the shares at the same price as everyone else who has applied for the IPO.
Book Building IPO – The book-building process on the other hand gives the investor a choice at which he wants to subscribe to the issue. The company opens a virtual book in which all the offers of investors are accepted at various price points. In case of an oversubscription, the company will start allotting shares to the highest bidder and then work itself lower.
The process of getting a company listed is long drawn and requires meticulous planning. SEBI has mandated Merchant Bankers to help guide companies through the entire IPO process.
Step 1: Select a Merchant Banker
The first step a company undertakes to get listed is to search for a good merchant banker who will help them to meet the strict guidelines laid down by SEBI. The merchant bankers are registered with SEBI and know the rules and regulations that a company will need to meet before it can get SEBI’s approval.
The merchant banker along with Advisors to the issue helps the company to walk through the maze and help them decide the ideal amount that can be raised. The team works on the valuation at which to price the issue and the timing of the issue.
Step 2: Registering for an IPO
After all the boxes have been ticked in terms of following the rules, the merchant banker sets about preparing a Draft Red Herring Prospectus (DRHP) which it submits to SEBI while registering the company’s IPO.
Some of the important information covered in the DRHP is
Definitions – Contains definitions of industry specific terms.
Industry description – This contains the working of the company in the overall industry segment including information like forecasts and predictions about the industry.
Promoters – The complete details of the person or persons who have promoted the company along with their capital history.
Management details – Contains all the details about the management and leadership team that run the company.
Financial statements – the document provides information about the financial condition of the company along with the auditors’ report.
Capital Structure – This provides details of the equity share capital which includes authorized share capital and paid up capital before the offer. The entire capital history of the company is mentioned along with funds raised at various times using different instruments and their pricing, new shareholders added, bonus shares, among others.
Industry overview – as mentioned above, the same analysis should be checked as the future of the industry and the company will determine whether to invest in the IPO or not.
Objective – this talks about what the company plans to do with the money that it wants to raise which can be an expansion or paying off debts to investors.
Risk factors – While the risk factors will be a bit generic it is important to see them in more detail. There can be cases where the company might be facing a number of legal issues including criminal, huge debts, patent infringement among others. A company is expected to mention all the risk factors, internal and external in the DRHP.
Step 3:Verification by Securities and Exchange Board of India (SEBI)
The DRHP is verified by SEBI checks if all the guidelines are followed and the background of the promoters and the company. In case of any changes, the market regulator informs the merchant banker and the company who after making the required corrections resubmits for verification. The process goes on till SEBI clears the company for the issue.
Step 4: The Roadshow
After all the formalities are completed, the merchant banker or a team of merchant bankers are ready to hit the road taking the company management to meet institutions, big investors, brokers, and media. The idea is to explain to these investors the rationale of investing in the company.
Research analysts, based on their analysis come out with their recommendations on these IPOs, which are then circulated among the broker’s clients. Institutions on the other hand based their buy decision on their own analysis and management interaction.
Roadshows are an important part of an IPO process, especially for bigger companies as investors are not aware of them and would like to understand the management’s and promoters’ body language.
Step 5: Pricing the IPO
After the roads and gathering market intelligence, the merchant bankers and company management decides on pricing the IPO. Various quantitative and qualitative approaches are taken to fix the IPO price.
The companies have a choice of going in for a Fixed Price IPO or taking a Book Building approach. In the case of a fixed price route, the price is announced beforehand, but in the Book Building approach, a lower and upper band is announced. Investors can choose a price between these two bands to apply for the issue. While bidding, the investors have to bid as per the company quoted Lot Price.
Step 6: Allotting of shares.
The booking is typically open for three to five working days during which time investors can place their bids. After the book is closed the company will first allot shares to the highest bidder and then move downwards.
After the IPO is launched, all bids for the shares are registered online. All the ineligible bids are eliminated through an online process.
In case the successful bids are less than or equal to the number of shares offered than every applicant who has applied will be assigned shares. But if the successful bids are more than the number of shares offered then there is a proportional allotment of shares.
The process to apply for an IPO through TradeSmart for an investor is fairly straightforward and easy. You can have a look at the detailed process here.
Select how you intend to apply — online or offline.
In an online process, the amount equivalent to the shares applied for and the price at which it is applied is blocked and is only debited after you receive the allotted shares. In case of no allotment, the entire amount is refunded to the account.
For the offline process, one has to approach the bank/broker office and fill out the application form with all your details for the IPO.
Fixed Price Offering is when the company going public determines a fixed price for the shares when they are offered to the general public.
An IPO is primarily a fundraising method for a private company which is making the transition to a private enterprise. Some of the other benefits include providing liquidity to company’s founders and taking advantage of a higher valuation.
One can go through a brokerage firm to apply for an IPO, however access may be limited to the firm’s bigger clients to asymmetry between demand and supply. Another option can be to apply through mutual funds.
Yes it is mandatory to have a PAN number. Ensure that the PAN number matches and is correct as any mismatch can lead to cancellation of allotment.
When a company launches its IPO, investors can’t just buy a single share or any number of shares. There is a minimum number of shares that an investor apply for which is usually given in the form of “lots”. Each lot contains a set number of shares. For example, if the lot size of a company is 50 shares, then the investor can buy minimum 50 shares and in multiples of 50 only.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
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Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.