What is the IPO procedure in India?

Remember Ravi from our first chapter? He took the bold step to launch an Initial Public Offering (IPO) to take his tech company to the next level. But did you wonder what specific steps Ravi had to follow to transform his private venture into a publicly traded company?

Transitioning from a private to a public company involves a structured procedure, designed to protect investors, and ensure transparency. In this chapter, we will look into the procedure, providing you with a comprehensive understanding of how an IPO is successfully executed in India.

Let’s get started!

Step 1: Hire an Investment Bank

To start with the IPO process, a company needs expert guidance, which is where investment banks come in. These banks, often more than one, form a team of underwriters to help understand the complex journey to becoming a publicly traded company. The team starts by thoroughly analysing the company's financial health and examining its assets and liabilities to create a tailored financial plan. An underwriting agreement is then signed, outlining the deal's specifics, including the amount of capital to be raised and the type of securities to be issued. While the underwriters ensure raising the necessary funds, they do not shoulder all the associated risks. This initial step sets the foundation for a successful IPO, ensuring the company is well-prepared for the public market.

Step 2: Prepare RHP and register with the SEBI

In the second step, the company, in collaboration with its underwriters, files a registration statement as required by the Companies Act. This includes the Draft Red Herring Prospectus (RHP), which is packed with essential details: financial data, a description of the industry and business, management information, an estimated share price, risk reports, and the company’s business plans. The RHP also outlines how the company will utilize the funds raised from the IPO and the details of the securities offered for public investment. These documents must be submitted to the local Registrar of Companies (ROC) at least three days before the public bidding begins. Following this, the company applies for the IPO to SEBI. The initial prospectus is called a 'red herring' because it contains a disclaimer stating it is not the final prospectus. However, it must include all the obligations of the final prospectus, and SEBI and the ROC must approve any changes. SEBI reviews the registration statement to ensure it meets stringent guidelines, guaranteeing full disclosure of information potential investors need to know. If the statement is compliant, SEBI gives the green light; if not, it is returned with comments for revision. The company must address these comments and refile the registration. Only after SEBI's approval can the company set the IPO date and release the final prospectus. This phase also tests the waters among potential investors, gauging interest in the upcoming IPO.

Step 3: Application to the Stock Exchange

After preparing the necessary documents and receiving SEBI’s approval, the next step for the company is to decide on the stock exchange where it will list its shares.

Step 4: Go on a roadshow

Before the IPO goes public, the company's executives go on an intensive two-week roadshow. This phase involves travelling to major financial centres across the country, where they present the upcoming IPO to potential investors, primarily Qualified Institutional Buyers (QIBs). The Roadshow is a marketing process designed to generate positive interest and excitement about the IPO. Executives showcase the company's strengths, financial health, and growth prospects through detailed presentations of facts and figures. Additionally, during this stage, the company may offer larger organizations the chance to buy shares at a predetermined price before they are available to the general public.

Step 5: IPO is priced

The price or price band is fixed, depending on whether the company wants to float a Fixed Price IPO or Book Building Issue. To learn more about the types of IPOs, refer to Chapter 1 of this module.

Step 6: Make it available to the public

On a planned date, the company’s IPO application forms become available to the public. These forms can be obtained from designated banks or broker firms, and once filled out, one can submit them along with a cheque or online payment. SEBI mandates that the IPO is available for public bidding for a period, typically five working days. Timing is important in this stage; companies must strategically choose when to offer their shares to maximize earnings from the sale. Often, smaller companies avoid launching their IPOs when larger companies are also entering the market to avoid losing attention. Once the IPO bidding period closes, the company submits the final prospectus to both the ROC and SEBI. This document includes the total number of shares allotted and the final issue price, marking the close of the sale.

Step 7: Going through with the IPO

Once the IPO price is finalized, stakeholders and underwriters collaborate to determine the share allocation for each investor. Typically, investors receive full securities unless the IPO is oversubscribed. If oversubscription occurs, shares are distributed proportionately. For example, in the case of five times oversubscription, an application for 10 lakh shares would receive only 2 lakh shares. The allocated shares are credited to the investors' demat accounts, and refunds are issued for any oversubscribed amounts. Businesses must also ensure their internal investors do not trade the shares to manipulate IPO stock prices. IPO shares are allotted to bidders within 10 days of the last bidding date. Once the securities are allotted, trading begins on the stock market, marking the company's official entry into public trading.

Now that you have understood the IPO procedure in India, you can check out the IPO reviews on Kotak Securities’ YouTube channel and website. Stay informed and make smart investment decisions.

Happy Learning!