Last Updated on January 24, 2023
An Initial Public Offering is a process through which an unlisted company can be listed on the stock exchange by offering its shares to the public in the primary market. The objective of an IPO may be raising capital, expanding of existing activities of the company, financing new projects, selling its owners or existing shareholders’ stake, or any other objective specified by the companies in their offer document.
The privately-owned companies first convert into public companies before going for an IPO. The companies through IPO, offers its shares to the public for the first time.
Investors can apply for an IPO offline by filling a physical form and submit it to the bank or through an online process. Generally, banks and brokerage firms provide facility to online submit an application for the IPO.
Checkout the list of upcoming and latest IPO in India, here.
How IPO Works?
The process of an initial public offering takes several months to complete. The company has to go through several steps and undergo compliances before making a public offer. Let’s understand the whole process.
Step1. General Meeting
The company going for an IPO will have to conduct a board meeting and a decision on the issue of equity shares is agreed upon in this board meeting. Then, the company by giving notice to the initial shareholders’ who have put capital in the company conducts a general meeting. In the general meeting, the promoters’ have to agree for the issue of equity shares to the public.
Step2. Special Resolution
The company has to file a special resolution with the registrar for the approval to issue equity shares to the public and also to convert private company into a public company. Company must ensure all the compliances and eligibility criteria before apply to the registrar.
Step3. Appointment of Intermediaries
The company appoint following intermediaries i.e. Merchant banker, Registrar to issue, Banker to issue, Underwriters, Legal advisors, Depositories, Compliance officer and also enter into a valid contract by obtaining their consent in writing.
The merchant bankers help in determining the size of public issue and helps the company in the whole process. These bankers are experts in their field to provide professional management.
The underwriters are large financial institutions that guarantee payment in case of financial risk. They agree to sell a minimum number of securities of the company for a commission. The underwriters undergo an underwriting agreement to raise capital if the issue did not subscribe up to the required criteria.
Legal advisors and compliance officers make sure that all rules and regulations are fulfilled and proper due diligence is made.
Step4. Pricing of IPO
The company with the help of intermediaries decides the price of the issue. The shares are offered to purchase in lots. The price can be fixed or can be decided through the book building method.
In the fixed price method, a price is decided by the company and that price is fixed for each share. Example: company XYZ limited wants to issue 50 lakhs share each at a face value of Rs.10 at a premium of Rs.70. So, the offer price is Rs.70. Hence, want to raise up to Rs.35 crore.
In the book building method, a price band of floor price (low price) and a cap price (high price) that is 20% of floor price is fixed. The investor has to bid in between the range of floor and cap price. Example: company ABC limited wants to issue 20 lakhs share each at a face value of Rs.10. and a price band of Rs.50-Rs.60 is available for bidding by the investors.
Step5. Drafting Prospectus
Prospectus is a document which is require to draft before going for an IPO. The document contains all matters and information like the objective of the public offer, funding plan, company’s promoters details, name, address and contact details of the company, details of directors, compliance officer, details of intermediaries, credit rating agencies involved, dates relating to opening and closing of IPO.
A red herring prospectus is prepared and distributed among the parties involved in IPO before providing the prospectus. The red herring prospectus is an initial document that did not contain the full details of pricing and quantities of shares to be offered.
It is required to be forward to the regulatory body for the approval before the distribution of a detailed prospectus. In India, the regulatory body establish for this purpose is Security and Exchange Board of India (SEBI), in USA the Securities and Exchange Commission (SEC).
Step6. Filing and approval
A copy of the prospectus is required to be forwarded to the regulatory body along with necessary documents for observation, analysis and approval.
Copies of prospectus also need to be forward to the registrar of the company and to the stock exchange where the shares of the company are proposed to be listed.
Step7. IPO Advertisement
The information on public issues through an IPO is advertise by the company. This advertisement should be required to publish in at least two newspapers 10 days prior to an IPO.
The advertisement also includes the merchant bankers and underwriters of the issue and future plans of the company.
Step8. Issue and Allotment
The IPO should be open for at least three days and a maximum of 10 days. The investors’ can put a bidding to purchase the company’s share in IPO until it is closed.
In case if the book building method of pricing is followed then a cut-off price for allotment is fixed. The allotment of shares is only made if the IPO is subscribed up to 90% of its size.
How to apply for an IPO
Application for an IPO of the company can be made offline and online. Nowadays online process is popular as it eases the procedure to invest in IPOs. Let’s understand both the process.
- Account opening: To apply for an IPO offline a person must have a bank account and a Demat account. The money is kept and blocked in the bank account for the IPO until the allotment of shares is done. The shares after allotment will be credited and are kept in the Demat account until you decide to further sell those shares.
- Choose IPO: Check for the ongoing and upcoming IPOs you want to apply for. You will get to know about the details through newspapers and by checking about IPO on the internet or on company websites.
- Collect IPO form: Visit your bank or broker and ask for a physical IPO form. They will provide you a form along with an ASBA application. You can also download the form at stock exchange websites.
- Fill details: You need to fill in all the required details like name, bank account number, Demat account number, the number of lots, bid price, PAN details, and other information ask in the form and submit it to your bank. Must check whether your bank is an ASBA participant or not.
- Open accounts: You have to visit a financial institution or broker/brokerage firms that will provide the facility to open a trading account along with a Demat account. You can also open a trading account online via their websites. Also, must have a bank account, if not then you have to open a bank account as well. The bank account is linked with your trading account.
- Choose IPO: The financial institution and brokers provide a facility to apply online via trading account. You have to login through your trading account and check in the IPO section. There you will see a list of ongoing and upcoming IPOs of different companies. Select an IPO you wish to invest in.
- Fill details: After selection, you need to fill in the number of lots (shares in IPO offered in lots), Bid price, or cut-off price and click on the submit button.
- Payment: After submission, the application will ask for the payment. One can choose the payment option through internet banking facility or other available methods. After completing, the payment equivalent to the bid amount is blocked by the bank under the ASBA facility. Once you have allotted the shares the payment will release by the banks and made to the company.
- Credit of shares: After allotment, the shares are credited to the Demat account and is reflected in the portfolio section of your trading account. Once listed on the stock exchange you can further trade those shares via your trading account at the stock market.
He is graduate in M.B.A Finance, and owner of the financial blog “Saifwealth.com“. He started this blog to share his knowdelge in the field of finance and to help people understand and aware about the financial world.