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Initial Public Offerings (IPO)

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What is IPO procedure in India?

IPO Issue Process

Step1: Appoint an Investment Bank

The company seeks advice from a team of underwriters or investment banks to initialize the process of IPO. The team works on the company’s current financial situation, future projects, and plans to cater financial needs. The underwriters sign the agreement with the company and assure the capital they will raise. Some of the leading IPO underwriters are Goldman Sachs, Morgan Stanley, Merrill Lynch, JM Financials, Kotak Securities, amongst others. They are also known as Book Running Lead Managers.

Step 2: Registration with SEBI

The company and the underwriters together prepare an offer document which contains all necessary information for investors to make an informed decision. The offer document is then submitted to SEBI for approval. Further, it should fulfill all mandatory requirements and comply with all rules and regulations. SEBI scrutinizes the document and cross-checks all the information provided.

Step 3: Draft the Red Herring Prospectus

An initial prospectus detailing financial records, future plans of the company and the specification of the expected share price range is prepared with assistance from underwriters. This is called Red Herring Prospectus (RHP) as it contains a warning signal that IPO is pending SEBI Approval. This is then shared with prospective investors who would be interested in buying the stock.

Step 4: Move on Road Show

Before the IPO goes public, the executives of the company go on countrywide roadshows visiting the major trade hubs to largely attract corporate and Qualified Institutional Buyers (QIBs). The marketing agenda includes the presentation of facts and figures of the company, its future plans and growth potential.

Step 5: SEBI Approval to go-ahead

Once SEBI is satisfied with the registration statement, it gives the approval to go-ahead for the IPO and to fix the date for the same. Sometimes SEBI may ask for amendments in the prospectus before it is made available to the public. The company is then required to select a stock exchange for listing its shares.

Step 6: Decide on Pricing of IPO and number of shares

After getting approval from SEBI, the company with the help of the underwriter decides on the fixed price or price band of the shares as well as the number of shares to be offered. 

There are two types of issues:

Fixed Price: The Issuer decides the issue price and mentions it in the offer document. 

Book Building: When the price is determined based on the maximum bid received at a particular price in the given price range it is called price discovery through the book-building process.

Step 7: Publicly available for purchase

On the planned date, the prospectus and application forms are made available both online and offline. Investors can also obtain forms from the designated banks or brokerage firms. The application forms are filled and to be submitted by investors along with a cheque or can apply online as well. IPOs are generally open to the public for three working days during which investors can subscribe to the issue, with maximum bids received on the last working day.

Note: There are several categories of investors in an IPO, which we will discuss in the next section. 

Step 8: Share Allotment and Listing on the Stock Exchange

Once the IPO is closed and all subscriptions are received, the final price at which the allotment is to be made is determined.  However, in the case of oversubscription, Investors will get refunds directly in the investor’s bank account. After allotment of shares, the company gets listed on the stock exchange and is open for secondary market trading of its shares.We will discuss more on the topic of how the shares are allotted to investors in our upcoming units. 

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