How is an IPO issued?
What is the IPO procedure?
A private company has to take various steps in order to go public. They are:
Selecting an investment bank
The first step is to select an investment bank as an underwriter. Here, the role of an investment bank is to help the company establish various details such as
- How much money the company hopes to raise
- The type of securities that will be offered
- The initial price per share
For a large IPO, there can be multiple investment banks involved. In short, investment banks act as facilitators in the IPO process.
Creating the Red Herring prospectus
The next step of the IPO process is to create the ‘Red Herring Prospectus’. This is done with the help of underwriters. The prospectus includes various segments such as financial records, future plans for the company, potential risks in the market and expected share price range. Many times, underwriters go on road shows in order to attract potential institutional investors after they create the red herring prospectus.
The prospectus is presented to the Securities and Exchange Board of India (SEBI). If SEBI is satisfied, it green-lights the initial public offering (IPO) process. In addition, it also gives a date and time for the IPO. But in case SEBI is not satisfied, it asks for changes to be made before the prospectus can be shared with public investors.
Stock exchange approval
Listing is the process where securities are allowed to deal on a recognised stock exchange. But for that to happen, the company needs to be approved by the exchange. For instance, the Bombay Stock Exchange (BSE) has a listing department whose purpose is to grant approval for securities of companies. The BSE has a list of criteria which needs to be followed for the company to be listed on its exchange.
- The minimum issue size should be Rs 10 crore.
- The minimum market capitalization of the company should be Rs 25 crore.
- The minimum post issue paid-up capital of the company should be Rs 10 crore.
Only if the company follows these criteria, it gets an approval from the BSE.
Subscription of shares
Once all the formalities are done, the company makes the shares available to investors. This is done on the dates specified in the prospectus. Investors who wish to apply for shares have to fill out and submit the IPO application form.
The shares are allotted to different investors based on the demand and price quoted in their IPO application forms. Once this is done, investors get the shares credited to their demat account. In case of oversubscription (if the demand for shares is higher than the number of shares floated by the company), investors may not get the number of shares they originally wanted. They may get fewer shares after a lottery is done. Some investors may not even get any shares. In such cases, these investors get a refund of their money.
To sum up
In India and around the world, companies that decide to go public and their underwriters try their best make the IPO a very successful event. Many companies have experienced a sharp surge in stock price on the first day of trading.
However, there are chances that the stock price falls over time. It largely depends on the company’s fundamentals. If they are strong, they are likely to do well in the long run. If not, the IPO may not be successful. Company fundamentals can be gauged by the cash flow or its capacity to retain profits for expansion.