In a previous article 'Getting started with IPO', we have found the answers to a few critical questions like, What is an IPO? Why do companies go public? What are the advantages, and disadvantages of IPO? What are the alternatives to an IPO?
In this article, I would like to discuss the sequence of events associated with the IPO from the start to the end. But first of all, we need to be aware of a few key jargons to be able to understand the sequence of the IPO process entirely.
IPO related Jargons
Price band
This refers to the price range within which investors can bid for the company stock for the first time or the price range between which the stock gets listed. The spread between the floor of the price band and its cap, should not be more than 20% according to SEBI regulations. For example, if the price band is between Rs.200 and Rs.240, then the issue can list within the range.
Draft Red Herring Prospectus (DRHP)
The Draft Red Herring Prospectus, also known as the offer document, includes all the data about the business, its promoters, projects, financial details, terms of the issue, objects of raising the money, etc. The IPO DRHP is utilized to invite subscriptions to the issuer's current offering. It contains all the relevant details except for the price and the number of shares being offered.
Merchant banker
The offer document (or DRHP), which includes all the information on the firm, is prepared by the merchant banker after doing the necessary due diligence. The merchant banker for the IPO is also in charge of promoting the issue and making sure that all regulatory requirements are met during the issue process.
Bankers to the issue
By clearly stating the status of the funds that are accessible to the registrars, bankers to the issue facilitate the transfer of money throughout the issue process, enabling the registrars to confirm the basis of allocation.
Registrars to the issue
They are involved in finalizing the basis of allotment in an issue and in sending refunds, allotment details, etc.
Underwriters
These are intermediaries, who undertake to subscribe to the securities offered by the company if it is not fully subscribed by the public.
Under subscription
An IPO is undersubscribed if the bids received are less than the number of shares offered. Let's assume that the business intends to offer 200,000 shares to the general public. When it is revealed during the book-building process that only 150,000 bids were received, the issue is said to be under-subscribed. Given that it reflects unfavorable public opinion, this is not a good scenario to be in.
Oversubscription
An IPO is oversubscribed if the bids received are more than the number of shares on offer. The offering is said to be 1.5 times oversubscribed if there are 300,000 bids for the 200,000 shares that are up for grabs.
Green-shoe option
This green-shoe option enables the issuer company to release additional shares (typically 15%) in the event of an oversubscription. Provisions about this are mentioned in the underwriting agreement. This is also called the overallotment option.
IPO Process steps
Step 1: Hiring Of An Underwriter or Investment Bank
The firm will seek the assistance of financial experts, such as merchant bankers or Book Running lead managers, to begin the initial public offering process. The underwriters provide the firm with assurances on the funding received and act as intermediaries between the company and its investors. The specialists will also review the company's critical financial metrics and sign an underwriting agreement.
Typically, the underwriting agreement will include the following elements:
- Details of the deal
- Amount to be raised
- information about the securities issued
Step 2: Registration For IPO
The drafts prospectus, also known as the Draft Red Herring Prospectus (DRHP), is created as part of this IPO process, along with a registration statement. According to the Companies Act, submission of DRHP is mandatory. All required disclosures under the SEBI and Companies Act are included in this paper.
Here are some of the main elements of DRHP:
Definitions: It includes explanations for terminology used in the specific industry.
Risk Factors: In this section, the potential issues that could affect a company's finances are discussed.
Use of Proceeds: In this section, it is made clear what will be done with the funds received from investors.
Industry Description: This section describes the operations of the firm within the broader industry segment. For instance, if the organization is in the IT sector, this section will include forecasts and predictions regarding the segment.
Business Description: This section will detail the core business activities of the company.
Management: This section provides information about key management personnel.
Financial Description: This section comprises financial statements along with the auditor's report.
Legal and Other Information: This section details the litigation against the company along with miscellaneous information.
Check out a DHRP document here.
The DRHP document has to be submitted to the registrar of companies, three days before the offer opens to the public for bidding. Additionally, the filed registration statement must adhere to SEC regulations. Post-submission, the company can make an application for an IPO to SEBI.
Step 3: Verification by SEBI
The market regulator SEBI then verifies the company's disclosure of the facts. SEBI makes the decision on whether to issue a go-ahead or a ‘no go’ to the IPO. The business can announce a date for its IPO if approval is granted.
Step 4: Making An Application To The Stock Exchange
The company now has to make an application to the stock exchange for floating its initial issue.
Step 5: Creating a Buzz By Roadshows
The business aims to generate excitement in the market through roadshows prior to an IPO becoming public. The company's executives and employees will spread the word about the upcoming IPO across the nation over a two-week period. In essence, this is a marketing and promotion strategy to draw in possible investors. The key highlights of the company are shared with various people, including business analysts and fund managers. The executives employ a number of friendly techniques, including Q&A sessions, multimedia presentations, group meetings, online virtual roadshows, and others.
Step 6: IPO Pricing
Now, the business has two options for starting the pricing of its IPO:
- Fixed price offering
- Bookbinding offering
In a fixed price offer, the price of the company's shares is disclosed upfront.
In the case of a book binding offer, a price range of 20% is declared, after which investors may submit bids that fall within the price range.
Investors must submit their bids in accordance with the minimum number of shares to be purchased, or the company's specified Lot price, for the auction. The company further specifies an IPO Floor Price, which is the lowest bid price, and an IPO Cap Price, which is the maximum bid price. Investors have the option to modify their bids within the allotted time during the booking period, which is normally three to five working days. The company will decide the Cut-Off price which is the final price at which the issue will be sold after the bidding procedure is through.
Step 7: Allotment of Shares
The firm and the underwriters will decide how many shares to allot to each investor once the IPO price is finalized. Partial allotments will be made if there is an over-subscription. Within 10 working days of the final bid date, the IPO equities are typically distributed to the winning bidders.
Also Read, IPO Allotment Process
What happens after the IPO?
Investors may offer to purchase shares during the bidding process (also known as the date of issue) within the predetermined price range. The Primary Market is the term used to describe the whole system where buyers and sellers compete for shares around the issuance date. The stock begins to trade publicly as soon as it is listed and makes its debut on the stock exchange. This is called the secondary market.
Once the stock transitions from primary markets to secondary markets, the stock gets traded daily on the stock exchange. People start buying and selling stocks regularly.
Now that you know the IPO process steps and their importance, you can make informed decisions to invest in IPOs.
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