In this article, we will go over the entire process from IPO announcement to allotment and listing on major Indian stock exchanges like NSE and BSE, including steps to check the allotment status.
IPO stands for Initial Public Offering. It refers to the process where a company offers its shares to the public to raise capital.
If we were to explain an IPO in simpler terms, it is a process where a private company offers its ownership to the public for the very first time and gets listed on a stock exchange. This process allows the company to access funds from a wide range of investors, including large institutional investors and everyday retail investors.
Table of Contents
Why Do Companies Go Public?
Companies decide to go public for several reasons:
(1) Raise Funds for Expansion or Debt Repayment:
- Expansion: When a company wants to grow, whether by entering new markets, developing new products, or increasing production capacity, it often needs a lot of money. An IPO (Initial Public Offering) provides a way to raise this capital by selling shares to the public. This infusion of funds can support the company’s growth strategies and help it expand its operations effectively.
- Debt Repayment: Companies sometimes take on debt to fund their operations or growth. By going public and raising funds, they can use some of the proceeds to pay off this debt. Reducing debt lowers interest expenses and can improve the company’s financial health, freeing up resources for other uses.
(2) Provide an Exit Opportunity for Early Investors:
- Angel Investors and Venture Capitalists: These investors often provide funding during the early, riskier stages of a company’s development. In return, they typically seek a significant return on their investment. An IPO offers them a chance to sell their shares and realize their gains. This liquidity event allows them to exit their investment and often serves as a way to distribute the financial rewards of their risk-taking.
(3) Enhance Company’s Reputation and Credibility:
- Visibility and Credibility: Being listed on a major stock exchange brings a company into the public eye, which can enhance its reputation. This increased visibility can attract more attention from customers, business partners, and potential employees. A public listing also signals to the market that the company has met stringent regulatory requirements and is considered stable and trustworthy, which can enhance its credibility in the business world.
(4) Improve Access to Capital Markets:
- Easier Access to Funds: Once a company is public, it has more options for raising additional funds. It can conduct secondary offerings to issue more shares and raise more capital. Additionally, being a publicly traded company often makes it easier to secure loans or issue bonds. The ability to raise capital through these various means can provide the company with financial flexibility for future projects or to navigate economic downturns.
Stages of a Company’s Funding
(1) Promoter’s Fund:
- Initial Funding: At the very beginning, a company is usually funded by its founders and their close family members. This stage is known as the “seed” or “self-funded” stage. The promoters, or founders, invest their own savings to get the business off the ground. This initial funding is often used to develop a prototype, conduct market research, and cover initial operating expenses. This stage is crucial for laying the foundation and proving the concept of the business.
(2) Angel Investors:
- Early-Stage Investment: As the company begins to show promise, it may seek additional funding from angel investors. Angel investors are usually wealthy individuals who provide capital in exchange for equity or convertible debt. They often have experience in the industry and can offer valuable advice and connections in addition to funding. Angel investors are crucial for early-stage companies that need more capital to refine their product, expand their market reach, or scale their operations. Their investment helps bridge the gap between the initial self-funding and more substantial venture capital funding.
(3) Venture Capital:
- Growth Funding: Once a company has demonstrated potential and needs substantial capital to grow, it turns to venture capital firms. Venture capitalists (VCs) are professional investors who manage large funds and invest in startups with high growth potential. They provide significant funding in exchange for equity, and they often take an active role in guiding the company’s strategy and operations. Venture capital is typically used for scaling the business, entering new markets, or developing new products. This stage often involves multiple rounds of funding, each intended to support specific growth milestones.
(4) IPO (Initial Public Offering):
- Public Funding: When a company reaches a stage where it is ready to expand further, achieve broader market visibility, or provide liquidity for early investors, it may go public through an IPO. During an IPO, the company offers its shares to the public on a stock exchange. This process involves creating and selling new shares to raise capital from a wide range of investors, including institutional investors and individual retail investors. The funds raised through an IPO can be used for various purposes, such as further expansion, paying down debt, or investing in research and development. Going public also provides the company with ongoing access to capital markets for future funding needs.
Each of these stages plays a vital role in a company’s growth and development. They reflect the evolving needs of the business as it matures from a startup to a publicly traded entity.
The IPO Process
1. Investment Bank Hiring:
- Role of Investment Bank: The company looking to go public hires an investment bank, also known as an underwriter. The investment bank plays a crucial role in managing the IPO process. It helps the company with various aspects such as valuation, regulatory compliance, and marketing. Major banks like ICICI, Axis, SBI, and HDFC often have dedicated investment banking divisions that specialize in handling IPOs.
- Choosing an Underwriter: The company selects an investment bank based on their reputation, expertise, and the quality of their services. The underwriter’s job is to ensure the IPO is successful and to manage the risks associated with issuing new shares.
2. Due Diligence and Filings:
- Underwriting Agreement: The investment bank agrees to buy the shares from the company and sell them to the public. There are two main types of underwriting:
- Firm Commitment: The investment bank buys all the shares from the company and assumes the risk of selling them. If the shares don’t sell, the investment bank absorbs the loss.
- Best-Efforts Commitment: The investment bank agrees to make its best effort to sell the shares but does not guarantee the sale of all shares. The company may end up with unsold shares.
- Red Herring Prospectus (RHP): This is a preliminary document that provides information about the company’s business, financials, and management. It helps potential investors make informed decisions. The RHP includes details about the company’s promoters, business model, competitive advantages, capital structure, and financial data. It’s called a “red herring” because it often has a disclaimer stating that the final price and number of shares may change.
- Compliance and Filings: The company must comply with regulations set by authorities such as the Securities and Exchange Board of India (SEBI), stock exchanges, and other relevant regulatory bodies. This includes submitting the RHP, financial statements, and other required documents.
3. Pricing:
- Valuation of the Company: The investment bank assesses the company’s value using various methods, including financial analysis, market conditions, and comparable company analysis. This valuation helps determine how much the company’s shares should be priced.
- Issue Price: The price at which shares will be offered to the public can be set in two ways:
- Fixed Price: The company and underwriter set a specific price for the shares.
- Book Building: A price range (price band) is set, and investors place bids within this range. The final price is determined based on the bids received and the level of demand. This process helps find the optimal price for the shares.
4. Distribution:
- Marketing the IPO: The company, with the help of the investment bank, promotes the IPO to potential investors. This involves roadshows, presentations, and meetings with institutional investors (such as mutual funds and pension funds) and retail investors. The goal is to generate interest and demand for the shares.
- Investor Applications: During the IPO period, investors submit their applications to purchase shares. They can apply through various channels, including online platforms and brokers.
5. Application and Allotment:
- Allotment Process: Once the application period ends, the shares are allotted to investors. The allotment is based on several factors:
- Oversubscription: If the IPO is oversubscribed (i.e., demand exceeds supply), shares are allocated based on a lottery system or proportional allocation.
- Investor Categories: Shares are typically allocated to different categories of investors, including Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and retail investors. Each category has a specific quota.
- Refunds: If an investor does not receive the full allotment or is not allotted any shares, the application money is refunded.
6. Listing:
- Trading Begins: After the IPO process is completed, the company’s shares are listed on a stock exchange. Trading typically begins within a few days after the IPO closes. This allows investors to buy and sell shares in the secondary market.
- Market Performance: The performance of the company’s shares in the stock market can be influenced by various factors, including market conditions, company performance, and investor sentiment. The company’s stock price will fluctuate based on supply and demand in the market.
This detailed process ensures that the IPO is conducted smoothly and transparently, providing the company with the capital it needs while offering investors the opportunity to participate in the company’s growth.
Conclusion
Understanding the IPO process is important for investors who are looking to participate in public offerings. By raising funds through an IPO, companies can fuel their growth, pay off debts, and provide liquidity for early investors. However, investing in IPOs involves risks, and potential investors should conduct thorough research or consult financial advisors before making decisions.
Key Terms Explained
- Book Building: A method of pricing shares where investors bid within a specified price range.
- Underwriter: An investment bank that guarantees the sale of shares in an IPO.
- Syndicate Underwriting: Multiple investment banks collaborate to manage the IPO.
- QIB: Qualified Institutional Buyers, like mutual funds and pension funds, that invest large sums.
- NII: Non-Institutional Investors, typically high net worth individuals.
- ASBA (Application Supported by Blocked Amount): A system that blocks funds in an investor’s account until shares are allotted.
- UPI: A payment method that can be used for IPO applications.
- Minimum Lot Size: Investors must buy at least a minimum number of shares.
- Over-subscription: When demand for shares exceeds the number of shares available.
- Listing Time: Shares typically begin trading on the stock exchange within three days after the IPO closes.
Disclaimer: This information is for educational purposes only and does not constitute financial advice. Always conduct your own research and consult with financial professionals before making investment decisions.