Initial Public Offering - Know All About IPO in Stock Market

What Is An Initial Public Offering In A Stock Market?

An ‘initial Public Offering', commonly referred to as an IPO, is when a private company's shares are offered to the public for the first time in a new stock issuance.An IPO is a way for a company to raise money in the primary market. It is a company's most significant source of funds.

To be more specific, when a company issues its shares to the general public for the first time, it is called an IPO. When a private company decides to go 'public,' it is referred to as a 'public offering.' Hence, a formerly privately owned company becomes a publicly-traded company through an IPO.

Before an IPO, a company has very few shareholders. The founders, angel investors, and venture capitalists all fall under the initial category of shareholders before a company is publicly listed. During an IPO, however, the corporation sells its stock to the general public. As an investor, any person withsufficient funds can become a shareholder by purchasing shares directly from the company.An IPO is a major step for a company as it allows the company to raise significant funds.

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The Securities Exchange Board of India (SEBI) was established in 1988. It is the major regulatory body for the Indian corporate securities market, including the primary and secondary markets. Therefore, SEBI governs and regulates IPOs in India.

Steps Involved In an IPO/ How to Launch an IPO?

It is essential for a company willing to go public to have the knowledge and be aware of the steps involved in an IPO, ensuring that the IPO is launched efficiently without major disruptions. As mentioned, the process of an IPO is regulated and governed by SEBI to prevent any financial scams and protect the investors' interests.

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Therefore, the process or steps involved in the launching of an IPO are as follows:

• Hiring an investment bank or an underwriter - When a company decides to obtain capital from the public market, it turns to experts in the field, such as underwriters or investment banks specialising in the IPO process. Normally, the company hires several different banks to do this. The underwriters examine the firm's financial situation and provide guidance by acting as intermediaries between the company and potential investors.An underwriting agreement is struck if the company believes these institutions can meet its needs. These banks ensure that These banks will raise the capital, but this is not a promise or a guarantee because it is dependent on market conditions and investor perceptions of the company.
• Registration for the IPO - The creation of a registration statement and a Draft Red Herring Prospectus (DRHP) are the next important steps to be undertaken to launch an IPO. As per the Companies Act, this is mandatory. The DRHP contains important information about the company, such as financials, strengths and risks, the reason for seeking funds, and the utilization of these funds. This document is created in collaboration with the company by the banks designated as lead managers. One of the most significant documents is the DRHP, which serves as a source of information for investors deciding whether or not to invest in the company. The underwriters will use this material to market the IPO.
• Verification by SEBI - The SEBI examines the prospectus after it is submitted. It ensures that all pertinent information regarding the organisation is disclosed. If SEBI believes that sufficient disclosures have not been provided or any inaccuracies, it is sent back to be corrected. The company then works on these concerns and files for registration again after making the necessary improvements. SEBI permits the company to proceed with the IPO once the document complies with the rules. The company planning an IPO must submit the Red Herring Prospectus at least three days before the offer is publicly available for bidding.
• Application to the stock exchange - Following the verification by SEBI, the company applies to the stock exchange where it intends to list the issue. The primary stock exchange in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
• Roadshow -The IPO's promotion can be considered the next important following step. This is done by the investment bankers and underwriters that have been hired. They'd travel to significant financial hotspots to spread the word about the IPO.The team promotes the IPO to attract or spark the interest of potential investors (qualified institutional buyers). Business analysts and fund managers are also among the people they encounter. They host Q&A sessions, small group gatherings, virtual presentations, and other events.
• Pricing the IPO - The company here can either go for a Fixed Price IPO or a Book Building Issue.

• Fixed price offering The company going public chooses a predetermined price at which its shares are offered to investors under fixed price. Before the firm becomes public, the investors know the share price.When making an application under this type of IPO, the investor must pay the full share price.
• Book Building Offering The public company offers a 20% price band on shares to investors as part of the book-building process. Investors bid on the shares after the bidding has closed, and the ultimate price is determined. Investors must select the number of shares they wish to purchase and their price range. There is no predetermined price per share, unlike a fixed price offering. The floor price refers to the lowest share price, while the cap price is the highest share price. Investor bids are used to determine the ultimate share price.

• IPO and Allotment - The final prospectus and application forms are accessible to the public online and offline for 5 working days. During this time, investors can apply for the IPO. Once the price has been set, the company and the underwriters will collaborate to establish how many shares each investor would receive. This is completed within ten days of the bidding deadline.The remaining stockholders will be refunded if the shares are oversubscribed. It is also verified that no shares are allocated to internal or linked parties during this process.

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Legal Requirements (Eligibility) For a Company to Go Public

There exist certain legal requirements and eligibility criteria which have to be fulfilled by an unlisted company for it to go public.

• Profitability Route - The following SEBI, IPO guidelines must be met if an unlisted company chooses the profitability route.

1. In the previous three years, the issuer's net worth must have exceeded INR 1 crore.
2. The issuer's net tangible assets must be at least INR 3 crores each, with no more than 50% of these assets held in the form of monetary assets in the past three years.
3. In at least three of the previous five years, the company's minimum average operating profit (before tax) must have exceeded INR 15 crores.
4. The issue size must not be more than five times the pre-issue net worth
5. If the company has changed its name, at least 50% of the previous year's revenue must have come from activities conducted under the new name.

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SEBI has provided two additional pathways for companies unable to meet the standards under the profitability route to make it easier for them to make their public offering.

• Qualified Institutional Buyer Route - Companies who require a big capital base for their operations but cannot meet the profitability route's standards might use the QIB route to make their public offering. A corporation can access the public interest via the book-building method under the QIB Route.Under this procedure, the Qualified Institutional Buyers must get 75 percent of the company's net offer to the public (QIBs). If the company fails to meet the QIB's minimum subscription requirement, it will be required to repay the subscription money.

An IPO is a complicated and lengthy process and one should take legal help before launching an IPO.