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 Offering (IPO) Process

The entire process of IPO India 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 approval.

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 shares.

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 happens daily.