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Process of IPO Explained in the most simplified way

The IPO Process

The process to get a company through to its IPO takes time, is expensive and must pass many regulatory hurdles. A very important component of going public is opening a firm’s books to public scrutiny, as well as the oversight of the Securities & Exchange Board of India (SEBI).

Step 1: Hire an investment bank

Step 2: Approval from the SEBI

Step 3: Draft the Red Herring document

Step 4: Go on road show

Step 5: IPO is priced

Step 6: Available to public

Step 7: Going through with the IPO

 

Step 1: Hire an investment bank

A company seeks guidance from a team of underwriters or investment banks to start the process of IPO. They are popularly referred as Book Running Lead Managers (BRLM). Most often, companies take services from more than one bank. The team will study the company’s current financial situation, work with their assets and liabilities and then they plan to cater to the financial needs. An underwriting agreement will be signed which will have all the details of the deal and the amount that will be raised, the securities that will be issued. Though the under-writers assure on the capital they will raise, they won’t make promises. Even the investment banks will not shoulder all the risks involved in the money movement.

Step 2: Approval from SEBI

The next step is to get an approval from the SEBI. SEBI functions as a watchdog of the investor and hence looks at the IPO from the point of view of the interests of the investors at large. SEBI scrutinizes the registration statement filed by the companies and the underwriter together. If the registration statement is in compliance to the guidelines set by SEBI, which ensures that the company has declared all the information that a potential customer must know, then it gets a green signal. Else it is sent back with comments. The company should then work on the comments and file for registration again.

Step 3: File the Red Herring Prospectus (RHP)

If the SEBI approval is received, the next step is to file a Red Herring Prospectus (RHP). It is an initial prospectus which contains the probable price estimate per share and other details regarding the IPO are shared with the people who are involved with the IPO. It is called a red herring document because the first page of the prospectus contains a warning which states that this is not a final prospectus.

Step 4: Go on road show

Before the IPO goes public, this phase happens over an action-packed two week. The executives of the Company travel around the country marketing the upcoming IPO to the potential investors, mostly QIBs. The agenda of the marketing includes a presentation of facts and figures, which will drum up the most positive interest.

Step 5: IPO is priced

Based on whether a company wants to go for a fixed price IPO or Book Building Issue, the fixed price or price band is fixed. A fixed price IPO will have a fixed price in the order document, and the book building issue will have a price band within which an investor can bid. The number of shares that will be sold is decided. The Company should also decide the stock exchange where it is going to list their shares. The Company asks the SEBI to announce the registration statement effectual so that purchases can be made.

Step 6: Available to public

On a planned date, the prospectus and application forms are made available to public online and offline. People can get a form from any designated banks or broker firms. Once they fill in the details, they can submit them with a cheque. Or they can submit it online as well. SEBI has fixed the period of availability of an IPO to public, which is usually 5 working days.

Step 7: Going through with the IPO

After the IPO price is finalized, the stakeholders and under-writers work together to decide how many shares will every investor receive. Investors will usually get full securities unless it is oversubscribed. The shares are credited to their demat account. The refund is given if the shares are oversubscribed. Once the securities are allotted, the stock market will start trading the Company’s IPO.

 

Pragati Rajoria

Pragati Rajoria

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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