All You Need to Know About IPO Process in India: We love it whenever an IPO is announced in the markets. Investors scramble to find out if the company has the potential to be the next Google or Apple. And the joy of receiving allotment cannot be compared. But have you ever wondered what goes on behind the scenes?

In this article, we take a look at the IPO process in India a company has to undergo before investing. Let us understand some Financial Jargons before diving into the process.

• IPO: An Initial Public Offer (IPO) refers to the process where a company offers its shares to the public in exchange for capital.
• Lead Manager/Underwriter: The lead managers or underwriters are independent financial institutions appointed by the company. They are responsible for coordinating all the activities surrounding the issue.
• DRHP: The Draft Red Herring Prospectus (DRHP) includes important information about the company, its business, the industry it is in, current shareholders, and its financials among various others.
• Bid: An offer made to purchase something at a certain price.

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7 Steps of IPO Process in India

Here are the steps involved in the IPO Process in India in order for a private company to go public:

1. Hiring of an Underwriter or Investment Bank

When a company decides that it will raise funds from the market they approach experts in the matter like underwriters or investment banks who specialize in the IPO process. Normally the company appoints more multiple banks for this.

The underwriters study the financial condition of the company and guide it by acting as intermediaries between the company and its potential investors.

If the company feels that these banks can meet their needs an underwriting agreement is signed. These banks assure the company that the capital will be raised but this is not a promise or a guarantee as this depends on market conditions and investor perception of the company.

2. Registration for the IPO

The next step involves creating a Draft Red Herring Prospectus and the registration statement. This is mandatory as per the Companies Act.

The DRHP includes key components about the company, its financials, its strengths, and risks, why it is raising funds and where will these funds be used. This document is prepared by the banks appointed as lead managers in coordination with the company.

The DRHP is one of the most important documents as it acts as a source of information helping investors decide on whether they should invest in the company or not. This document is also used by the underwriters to market the IPO.

3. Verification by SEBI

After the prospectus is submitted the SEBI reviews the document. Here it ensures that every important detail about the company has been disclosed.

If SEBI feels that adequate disclosures are not made or any errors exist then it is sent back to be changed. Then the company works on these issues and after making the required changes once again files for registration.

Once the document is compliant with the guidelines set, SEBI allows the company to carry on with the IPO.

The company going for an IPO is required to submit the Red Herring Prospectus at least 3 days before the offer is made available to the public for bidding. 

4. Application to Stock Exchange

The company then submits an application to the stock exchange where it plans to float the issue. 

5. Roadshow

One can look at the next step being the promotion of the IPO. This is undertaken by the investment bankers and underwriters appointed. They would travel to important financial destinations and create a buzz regarding the IPO.

The team advertises the IPO in an attempt to attract potential investors or get their attention. They also meet business analysts and fund managers. They hold sessions like Q&A, small group meetings, virtual presentations, etc. 

6. Pricing the IPO

The company here has the option to either go for a Fixed Price IPO or a Book Building Issue. Under Fixed-Price IPO the price of the company’s stocks is set and announced beforehand.

In a book building issue, the company sets a price band between which the investor can bid. Here the company sets an IPO Floor price which is the minimum price investors can bid and an IPO Cap price which is the maximum price they can bid. Based on this the highest price at which all the shares can be sold is determined.  

7. IPO and Allotment takes place

For a period that is usually 5 working days, the final prospectus and application forms are made available to the public both online and offline. Investors can apply for the IPO during this period. 

Once the price has finalised the company and the underwriters will work together to determine how many shares are to be allotted to each investor. This is done within 10 days of the last date of bidding.

If the shares are oversubscribed then the remaining shareholders are refunded. During this step, it is also ensured that no shares are allotted to internal or related parties. 

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Closing Thoughts

As we have many IPOs lined up to arrive in the markets hope this post helped in understanding the process better. That’s all for this post. You may also read FAQs about IPOs to get more insights.

Let us know what you think about the article on the IPO process in India in the comments below. Happy Investing! 

Aron Almeida

Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.