| March 26
What is an IPO and how does it work?
An initial public
offering, or IPO, is the very first sale of stock issued by a company to
the public. Prior to an IPO, the company is an unlisted company, with a
relatively small number of shareholders made up primarily of early investors
(such as founders, their families and friends) and professional investors (such
as venture capitalists or angel investors). The public, on the other hand,
consists of everybody else – any individual or institutional investor who
wasn’t involved in the early days of the company and who is interested in buying
shares of the company.
The Initial Public
The entire process of
is regulated by the Securities and Exchange Board of India (SEBI) to prevent
the possibility of fraud and safeguard investor interest.
Step No.1 Selection of Investment Bank
The first thing that
company management must do when they have taken a unanimous decision to go
public is to find an investment bank or a conglomerate of investment banks that will act as
underwriters on behalf of the company. Underwriters buy the shares of the
company and resell them to the general public. The company must also hire
lawyers that can guide them through the legal maze that an IPO setup can be. It
must be ready with detailed financial records for intensive fiscal health
scrutiny that SEBI would perform.
Step No.2 Preparation of Registration statement
The securities and
exchange board of India (SEBI) regulates the entire process of investment via
an IPO in India. A company intending to issue shares through IPOs first
registers with SEBI. SEBI scrutinizes the documents submitted, and them only
approves it. It must also see that registration statement fulfils all the mandatory
requirements and satisfies all rules and regulations.
Step No. 3 Getting the prospectus ready
While awaiting the
approval, the company prepares its prospectus, in which it mentions that SEBI’s
approval is pending. This prospectus is meant for prospective investors who
would be interested in buying the stock.
Step No. 4 The Road show
Once the prospectus
is ready, underwriters and company officials go on countrywide ‘road shows‘,
visiting the major trade hubs and promote the company’s IPO among select few
private buyers. They get a feel of investor response through these tours and
try to woo big investors.
Step No. 5 SEBI approval & a Go ahead
Once SEBI is
satisfied with the Registration Statement, it declares the statement to be
effective, giving a go-ahead for the IPO to happen and a date to be fixed for
the same. Sometimes it asks for amendments to be made before giving its
Step No. 6 Deciding on Price Band & Share Number
Once approved, the
company decides two things; it fixes the price of the share and the number of
shares it plans to issue.
There are two types
of IPO issues: fixed price and book building. In the former, the company
decides the price of the share in advance. In the latter, the company gives you
a range of prices. You then need to bid for shares within this range.
Step No. 7 Available to Public for Purchase
After deciding on the
type of issue, the company makes the shares available to the public. Investors
then submit applications showcasing their interest in buying the shares. Once
the company gets subscriptions from the public, it proceeds to allot the
Step No. 8 Listing
It involves listing
it on the stock market. After the shares are issued to investors in the primary
market, they get listed in the secondary market. Trading in these shares