When a company needs to raise a large corpus of funds, it approaches the general public through a process called the Initial Public Offering (IPO). But before doing so it needs to convert itself to a public limited company and make changes to its capital structure to allow new investors as shareholders.
There is a long drawn and well defined process by which a company raises money from the primary market and gets listed on the exchanges where its investors can either sell or trade in the shares.
In this article, we shall look at the process of how a company gets listed through an IPO.
Before we discuss the process involved in getting listed, it is important to know that the entire IPO process is regulated by the Securities and Exchange Board of India (SEBI). The market regulator has a list of criteria that needs to be met by the company.
The steps for applying for an IPO are as follows:
Financial experts such as investment bankers or merchant bankers conduct the IPO process on behalf of the company, acting as intermediaries between the company and investors. They handhold the company and guide them through the entire process of meeting SEBI’s guidelines, preparing the prospectus, pricing the issue and timing the IPO.
The investment bankers along with the company prepare a draft prospectus and a registration statement. This document is known as the Draft Red Herring Prospectus or DRHP. The most important document that a retail investor can have access to is the DRHP as it contains a wealth of information on the company.
As per section 32 of the Companies Act, submission of a red herring prospectus by companies is mandatory. The DRHP contains all the financial information, all mandatory disclosures as per SEBI, and the Companies Act. The key components of the prospectus include:
It includes definitions of industry specific terms. This section might not require diligent reading if you are analysing an offer from an industry you are well acquainted with.
Every business has to confront certain risk possibilities. This section factors in all the possibilities that could materially impact a company’s performance, especially post listing.
Is perhaps the most important section of RHP. It gives information about how money raised for investors will be used.
This section provides forecasts of the larger industry in which the company will function.
Details the core business activities of the company. It talks about how a company generates its profits.
Data and details about key management personnel, promoters and directors are provided in this section.
This section provides the auditor’s report and other financial information.
This section details the lawsuits against the company along with miscellaneous information.
This step involves verification by SEBI as it looks for errors and discrepancies. Only after SEBI approval can a company set a date for its IPO.
The Company then applies to the stock exchange where it wants to get its stocks listed.
Companies strive to create a buzz in the market before its IPO is open to the public. The company advertises the impending IPO in order to attract potential investors. The company management goes on a roadshow to sell the issue by meeting various funds, brokers and big investors. Media interaction is also part of the road show in order to advertise the key features of the company and highlight its credentials.
Pricing the IPO is an important task for which the company has two options of going through the IPO – a fixed either through fixed price offering or a book building offering.
In the case of book building offers a price range of 20% is announced and investors can place their bids within the price bracket. On the other hand in the case of fixed price shares the price of a company’s stock is announced before-hand.
As far as the bidding process is concerned the bid is supposed to be placed as per the Lot Size which is the minimum number of shares to be purchased. The company also provides the IPO Floor price and the IPO Cap price. The former is the minimum bidding price and the latter the highest. The bid is usually open for 3-5 days and investors have the option of revising their bids within the time frame. When the bidding process is complete, the company decides the cut-off price i.e. the price at which shares will be sold.
After the completion of the bidding process, the company decides the number of shares to be allotted to each investor. The company also ensures that no internal investors participate in the IPO trading process. This prevents manipulation or fraud. IPO stocks are allotted to bidders within 10 working days of the last bidding date.
The online method of applying for an IPO is through a stock broker’s website. This is the most convenient method of applying for an IPO. The process to apply for an IPO from TradeSmart is also very easy and simple. The entire step-by-step method is detailed out here so that you don’t face any issues and is done seamlessly.
The offline or traditional method of applying for an IPO is by filling in a physical application form and submitting it at the nearest collection centre. You will have to approach your bank or your stock broker, fill out the application form. Ensure that your details and your PAN and demat account number are correctly mentioned if not you will not be able to get any allotment of shares. Once you check the details, submit the form along with the cheaque of the amount to your bank or broker and they will ensure the funds are kept aside for allotment purposes.
Note that whether you apply for an IPO online or offline, it is mandatory to have a demat and trading account in order to store the shares and sell them if you wish to in the future. TradeSmart demat account is easy to open which hardly takes 10 minutes to enter the world of trading and investing.
The minimum bidding price is called the floor price.
Since each person can bid using their PAN number only once, the best way to increase your chances of getting an allotment is by asking your friends and relatives to open multiple demat accounts on your behalf.
The highest bidding price is called the cap price.
No. No, you can only sell the stocks once the IPO gets listed on the stock exchanges.
Yes, bidders can revise their bids within the stipulated time frame i.e. 3-5 days.
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.