Initial Public Offering (IPO)

What is Initial Public Offering (IPO)?

Every company or business needs money to start and expand its operations. It obtains money by issuing shares or by borrowing. If it wants to raise money through the first option, it must invite public investors to purchase its shares. This first invitation to the public by such a company in the stock market is called the Initial Public Offering or IPO. With an IPO, the company lists its shares on the stock exchange.

When we purchase such shares, we make an initial investment in the company and get ownership in it, in proportion to the value of our shares. We can buy more shares or sell the existing shares in the stock exchange.

What Are the Benefits of An IPO?

Certain benefits of an IPO to the issuing company are mentioned below:

• IPO provides an easy option for the company to acquire capital and fulfil its financial needs. The company can utilise the funds to procure equipment, invest in infrastructure, and pay off debts.
• With an IPO, a company can make its shares available for acquisitions and mergers. It can use the shares as a means of payment in case of such acquisitions and mergers
• The company can attract or retain talented employees at lower wages by offering them stock options.
• By listing the company on the stock exchange, the owners can receive a percentage of the company shares. Thus, they can get a suitable reward for their hard work in making the company successful.

It is worth looking at some of the “cons” attached to investing in an IPO as well:

• The long process and numerous legal compliances involved with an IPO often distract the company from its core business.
• The BRLMs/ investment bankers/underwriters hired by the company to ease the IPO process are quite expensive.
• SEBI conducts many periodic checks before a company floats its IPO. It involves huge disclosures. The competition may use such details to hamper the business of the company.

What Are the Points to Consider Before Investing in An IPO?

You should keep in mind the following points before investing in an IPO:

• Scrutinise the details provided in the prospectus to gain information about the company background
• Check the details of the BRLMs/investment bankers/underwriters associated with the company
• Be clear about the lock-in period of the company shareholding
• The stock market is subject to volatility. You may gain unbelievably high returns at times. At the same time, there are potential risks of eroding into your invested capital. You must remain vigilant at all times
• You must remember that the company is not liable to reimburse the capital invested by public investors.

What Are the Steps Involved in the Process of Issuing An IPO?

Here are the important steps involved in the process of issuing an IPO in India:

To start with, a company appoints an investment banker, commonly called Book Running Lead Managers (BRLM) to guide it through the IPO process. With his market insights, a BRLM will advise the company on the methodology and timing of the issue. He will study the current financial situation of the company, assets and liabilities, and help the company to get the best deal possible.

The Securities and Exchange Board of India (SEBI) is the nodal regulator for the Indian capital markets. The company, with the help of the BRLM, files for IPO registration with the SEBI, along with its business plan and fiscal data. It also needs to declare how the funds raised by the IPO are going to be utilised. SEBI will scrutinise the IPO from the investors’ points of view. It will raise objections in case of any doubts regarding the security of the public investment. On being satisfied with the details provided, SEBI accords the approval for the IPO. At this stage, the company will need to deposit an initial listing fee of Rs 50,000. The subsequent annual listing fee will vary based on the paid-up capital accumulated by the company.

After receiving SEBI’s approval, the next step is to file the RHP (Red Herring Prospectus). It includes the annual income statements of the company, balance sheet, business plan, price estimate per share, the proposed methodology of fund utilisation, objectives of the IPO issue, and so on. These details will be shared with potential investors.

Extensive marketing is done before the IPO goes public. The company executives present the facts and figures about the upcoming IPO to potential investors through mass media. The company promoters and BRLMs conduct meets with the brokers, investors, domestic funds, and large institutions to market the idea of the IPO.

In this step, the final price band of the IPO is set by the company. The price will appear in the order document and an investor can bid within this band. Also, the company will decide on the number of shares to be sold and the stock exchange where the shares will be listed. After this, the printed IPO application forms will be distributed to the brokers and distributors.

The IPO application forms and the prospectus are made available to the public on a planned date. People can submit the filled applications (with their personal, bank & Demat account details) along with the necessary payment online or offline. Usually, SEBI keeps an IPO open for five working days. The updated subscription numbers are received from the stock exchanges on a continuous basis.

After the issue is closed, the allotment among the investors is finalised within the next week. The allotment needs to be approved by the exchanges and the regulator. Post the allotment, the stocks of the company will be sold and purchased in the stock markets.

What Are the Documents Required for Registering An IPO?

The company must prepare the following documents in consultation with the BRLM/ investment banker/underwriter:

• A letter of engagement in the name of the BRLM/ investment banker/underwriter
• A registration statement – It has two parts
  • Private filings – It includes the information to be submitted to the regulatory authority, such as:
  • Annual financial statement of the company
  • Management background
  • Insider holdings
  • Distribution of shareholding
  • Legal issues faced by the company, if any
  • Track records of the company directors
  • Ticker symbol to be used by the company after listing
• The prospectus – It includes information to be provided to the investors
• Red Herring prospectus

How an Initial Public Offering (IPO) Works?

A business will first sell its shares to the public in an initial public offering (IPO) in India in order to raise money. Here are the general steps involved in an initial public offering process:

• Selection of Investment Bank: The company that wants to go public will first select an investment bank to manage the IPO. The investment bank will help in determining the offering price of the shares, underwriting the shares, and marketing the IPO.
• Due Diligence: The company and the investment bank will conduct due diligence to ensure that all financial and legal aspects are in order. This involves reviewing financial statements, legal contracts, and any potential risks.
• SEC Registration: The firm must file a registration statement with the Securities and Exchange Commission (SEC) in order to provide details about the company and the sale.
• Fixing the Price: Once the SEC has approved the registration statement, the company and the investment bank will decide on the selling price for the shares. The selling price is established in accordance with the financial performance of the business, market conditions, and share demand.
• Marketing: The investment bank will market the IPO to potential investors through roadshows, advertisements, and other methods to generate interest in the offering.
• Share Allocation: The investment bank will distribute shares to big and retail buyers if the IPO share market is oversubscribed. The bulk of the shares are usually distributed to institutional investors.
• Selling: Following the close of the initial public offering (IPO), the shares are admitted to trading on a stock market. Share prices will change according to quantity and demand in the market.

How are Shares Allocated in an IPO?

The manner in which the offering was received by investors will determine how the allocation process is conducted. When it comes to IPOs, there are various types of investors like:

• Qualified Institutional buyers (QIBs)
• Non institutional investors (NIIs)
• Retail Individual investors (RIIs)

Applications received act as a stand-in for the total stock demand in the retail industry. If the demand is less than or equal to the number of shares available in the retail group, you will receive the full allocation of shares. The word ‘Oversubscription’ refers to a situation in which demand outweighs availability. It's not uncommon for an offering to be five times oversold. This shows that there is a five times higher demand for goods than there is available! Investors are granted shares in the retail industry in these circumstances based on a draw. This automated process guarantees that shares are allocated to purchasers equally.

What is an IPO in the Stock Market?

IPO in share market is a procedure by which a business generates money by releasing its shares to the general public. In an IPO, the company issues new shares to investors and raises capital in exchange for partial ownership of the company. The shares are sold through a public offering, where the general public can participate and buy shares of the company. IPOs are one of the primary ways for companies to raise capital from the public and get listed on a stock exchange.

The prospectus contains information about the first selling of shares that can be accessed by institutional investors, high net worth people, and the general public. The lengthy prospectus contains information about the planned products in great depth. Once the initial public offering stocks is complete, the company's shares are published and are available for unrestricted market trading. Both in terms of absolute value and as a percentage of the total share capital, the stock market sets a minimum free float on the shares.

Why Vakilsearch?

Once you are ready to launch your IPO, we would facilitate connections with our enviable network of investors. We have partnered with prominent and active venture capitalists and angel investors. We can facilitate positive responses and deal closure for you.

We make your interaction with the government as smooth as possible by doing all the paperwork for you. We will also give you absolute clarity on the process to set realistic expectations.

We provide access to reliable professionals and coordinate with them to fulfil all your legal requirements. You will be mentored by successful fundraisers on how to enhance your pitching skills. Our dedicated team will ensure that you always stay on the right side of regulatory compliance.

With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.

FAQs on Initial Public Offering (IPO)