What is an IPO?

An Initial Public Offering (IPO) is the process by which a privately held company becomes a publicly-traded company by offering its shares to the general public for the first time. However, before we dive into the process of an IPO and its intricacies it’s important to understand why a company would go public. Along with this, we need to answer quite a few questions that will give you more insights into the IPO Market.

Namely:

1. Why did the company decide to file for an IPO? 
2. What would happen to the existing shareholders after the IPO?
3. What does the general public look for before they subscribe to the IPO?
4. How does the IPO process evolve?
5. Which of the financial intermediaries involved in the IPO markets?
6. What happens after the company goes public?

Why did the company decide to file for an IPO?

There are numerous reasons but undoubtedly the main reason to raise funds is to satisfy their CAPEX requirement.

Other reasons include :

• Provide an exit to early investors
• Provide an employee reward - Employees working for the company may have shares allotted to them as an incentive in their contract. This is called the ‘employee stock option’. These shares are allotted at a discount and when the company goes Public these employees have an option to make a profit.
• Improve Visibility and Market Exposure - A listed stock will attract the attention of Foreign Investors, Hedge Funds and other corporations
• Companies have leverage when obtaining loans from financial institutions.
• Increase credibility with the Public

Once deciding to go public the company has to go through a series of steps to ensure a successful IPO. The first step is to appoint a Merchant Banker. A Merchant Banker assists the company in all different aspects of the IPO Process.

• Issue the due diligence certificate and ensure the company’s legal compliance
• Prepare their listing document and the Red Herring Prospectus (DRHP).
• Underwrite shares - This implies that the merchant banker(s) agree to buy all or part of the IPO shares and resell them to the public.
• Set a Price band for the IPO. The price band is the upper and lower limit of the share price within which the company will go public.
• Appoint other intermediaries.

Having established the necessary requirements before the company goes public we need to lay down the sequence of events under the SEBI guidelines.

• Appoint a Merchant Banker
• Apply to the SEBI with a Registration Statement- the registration statement includes details on why the company plans to go public, the finances of the company and why they plan to go company.
• Receive a go-ahead nod from the SEBI. This is based on the registration statement.
• Publicity and Marketing of the IPO
• Fix the Price Band of the IPO
• Book Building - This is when the company has officially gone public and the public can subscribe for shares. If the price band is between 150-200 the public can choose a price that is fair enough for the IPO. Book Building is the process where all these price points with their respective quantities are collected.
• Closure - Once the book building process is completed the price point at which the share will be listed is decided. The Price point is usually the one at which maximum bids have been received.
• DRHP - If the company gets the go-ahead from the SEBI then the company needs to prepare and issue the Draft Red Herring Prospectus(DRHP).

The DRHP is a public document which contains the following details:

• The estimated size of the IPO
• The estimated number of shares being offered to the public
• Why the company wants to go public and how does the company plan to utilize the funds along with the timeline projection of fund utilization
• Business description including the revenue model, expenditure details
• Complete financial statements
• Management Discussion and Analysis – how the company perceives future business operations to emerge
• Risks involved in the business
• Management details and their background

What happens after the IPO?

Once the stock is listed on the stock exchange and is traded publicly it has transitioned from the Primary Market to the Secondary Market. It is now treated as any other stock.