Understanding the IPO Journey: From Investment Banks to Public Trading
For many companies, going public is a major step forward. An initial public offering, or IPO, isn’t just about raising funds—it puts the company in the spotlight, attracts new investors, and kicks off a fresh chapter of growth. But how does an IPO actually work? Let’s walk through the process step by step in simple terms, so by the end, you’ll understand what it involves.
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To initiate the IPO process, a company seeks guidance from a team of underwriters or investment banks—often engaging more than one bank. This team reviews the company’s financial status, analyses its assets and liabilities, and forms a strategy to meet its funding needs. An underwriting agreement is drawn up, detailing the amount to be raised and the types of securities to be issued. Although the underwriters guarantee the capital to be raised, they do not fully absorb all risks tied to the investment process.
The company and its underwriters collaborate to submit a registration statement (required under the Companies Act) along with a Draft Red Herring Prospectus (RHP). The RHP contains comprehensive financial data, a business and industry overview, management details, estimated share price, risk disclosures, and the intended use of IPO proceeds, in accordance with SEBI and Companies Act requirements. This documentation is submitted to the local Registrar of Companies (ROC) at least three days before the IPO opens for bidding. The company then applies for SEBI approval.
The RHP is preliminary, as noted by a disclaimer on its first page, distinguishing it from the final prospectus. Any differences between the RHP and the final prospectus must be highlighted and approved by SEBI and the ROC. SEBI then evaluates the filing against its stringent guidelines, ensuring all necessary information is disclosed to potential investors. If the application meets SEBI standards, the company receives approval to proceed; otherwise, it must address SEBI's feedback before resubmitting. Following SEBI’s green light, the company sets the IPO date, releases the financial prospectus, and gauges market interest.
Once the company is ready to move forward with the IPO, it must decide on the stock exchange where its shares will be listed. The choice of exchange is important as it determines the visibility, liquidity, and trading access of the company's shares to a range of investors. Companies typically consider major exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India, as these exchanges provide a high level of market access and regulatory oversight.
Before launching the IPO, the company’s executives embark on a roadshow over two weeks, marketing the IPO to potential investors, particularly Qualified Institutional Buyers (QIBs) in key financial centres. These presentations aim to generate interest by showcasing the company’s strengths. During this phase, select larger investors may also be offered an early chance to purchase shares at a predetermined price.
The IPO pricing is determined based on whether the company opts for a fixed price issue or a book building issue.
The company and its underwriters establish a fixed price per share, considering liabilities, target capital, demand, and other factors.
The company sets a price band within which investors can bid. The final price depends on demand, bids received, and target capital. Most companies prefer bookbuilding, as it allows for better price discovery. For this approach, the cap price can be up to 20% higher than the floor price, with books open for three days during which bids can be revised. The final issue price is known as the cut-off price.
On a pre-set date, application forms are made available to the public, who can submit their completed forms along with payment through banks or brokers, or online. SEBI mandates that an IPO is open for public subscription for five working days. Choosing the optimal timing to go public is crucial to maximising returns. Smaller companies often avoid IPOs when large corporations are launching theirs, as they may struggle to capture sufficient attention.
Once the IPO bidding period closes, the company submits its final prospectus to the ROC and SEBI, including the total shares allotted and the final issue price. Investors looking to stay updated can use an intraday app or ETF to access valuable insights and facilitate efficient trading once the shares are listed.
Following the finalisation of the IPO price, underwriters and stakeholders determine share allotments for each investor. Generally, full allotments are given unless the IPO is oversubscribed, in which case shares are allocated proportionately and any excess funds are refunded. Once the shares are allotted, they are credited to the investors’ demat accounts, and trading in the company’s shares on the stock market begins.
The company must also prevent internal investors from engaging in activities that might artificially influence stock prices post-IPO. Allotted shares are credited within ten days of the bidding’s closure. In cases of oversubscription, shares are proportionately distributed; for instance, if the IPO is oversubscribed four times, a bid for 1 million shares would yield only 250,000 shares.
Investors can use an options trading app or stock app for real-time market updates and tools, helping them track IPO trends and make decisions.
After an IPO, the stock price may go up or down when it starts trading on the stock market. SEBI has set lock-in periods, meaning that certain investors, like promoters and other key holders, must hold onto their shares for a specific time. When this lock-in period ends, some investors may sell their shares, which can cause a brief dip in the stock price.
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Disclaimer: This story is not part of Outlook Money's editorial content and was not created by Outlook Money journalists.