1. What is the IPO?
IPO stands for Initial Public Offering. It’s when a private company offers shares of its stock to
the public for the first time, allowing it to raise capital from outside investors.
1.1. Types of IPO in India
In India, there are mainly three types of IPOs (Initial Public Offerings):
1. Book Building Process: Here, the price of the shares is not fixed initially. Instead, the issuer
(company) and the lead manager (investment bank) determine a price range. Investors bid for
shares within this range, and the final price is determined based on demand.
2. Fixed Price Issue: In this type, the price of shares is predetermined and mentioned in the
offer document. Investors subscribe to the IPO at the fixed price.
3. Offer for Sale: This type involves existing shareholders (such as promoters, venture
capitalists, or other investors) selling their shares to the public. The company doesn’t receive
any funds from the sale; instead, the selling shareholders benefit from the proceeds.
1.3 IPO Process in India
Sure, here’s a simplified step-by-step guide to the IPO process in India:
1. Preparation Stage:
● The company opts for an initial public offering (IPO) and designates investment banks to
serve as underwriters.
● Drafting of offer document (Draft Red Herring Prospectus – DRHP) with details about the
company, its financials, risks, and the IPO.
● Regulatory approvals from SEBI (Securities and Exchange Board of India) for the IPO.
2. Marketing Stage:
● Roadshows and presentations to institutional investors and analysts to generate interest.
● Finalizing the price band for the IPO through the book-building process or setting a fixed
price.
● Filing the Red Herring Prospectus (RHP) with SEBI and stock exchanges.
3. Offer Period:
● Opening of the IPO for subscription, usually for a few days.
● Investors place bids at the offered price within the specified range (for book-building
process) or at the fixed price.
4. Allotment and Listing:
– Allotment of shares to investors based on the subscription bids and allocation rules.
– Refunds to investors for unsubscribed shares (if any).
– Listing of shares on the stock exchanges, allowing trading to commence
5. Post-IPO Compliance:
● Meeting post-listing compliance requirements such as periodic financial reporting,
disclosures, and corporate governance norms.
● Continuation of investor relations activities to maintain investor confidence and market
presence.
Throughout the process, the company, underwriters, and regulatory authorities work together
to ensure compliance with legal and financial standards and to facilitate a successful IPO.
1.5 IPO Allotment Timeline
The timeline for IPO allotment in India typically involves the following steps:
1. Issue Period: This is the period during which the IPO is open for subscription by investors.
Typically, the process spans over a few days.
2. Allotment: After the issue period ends, the allotment process begins. This involves allocating
shares to investors who have applied for them.
3. Refund/Debit: Investors who did not receive full allotment may receive refunds for the excess
amount paid during the application process.
4. Listing: Once the shares are allotted, the company gets listed on the stock exchange, and
trading begins.
The exact timeline can vary depending on the IPO and market conditions, but typically, the
entire process takes a few weeks from the start of the issue period to listing on the stock
exchange.
1.6 Why Companies offer IPO in India
Companies offer IPOs (Initial Public Offerings) in India for several reasons:
1. Capital Infusion: IPOs allow companies to raise capital by selling shares to the public. This
capital can be used for various purposes such as expansion, debt repayment, research and
development, or acquisitions.
2. Brand Visibility and Prestige: Going public can enhance a company’s brand visibility and
reputation. Being listed on a stock exchange can increase the company’s credibility and attract
more attention from investors, customers, and potential business partners.
3. Exit Strategy for Investors: IPOs provide an exit strategy for existing investors, such as
venture capitalists and private equity firms, who may want to sell their shares and realize their
investments.
4. Employee Incentives: IPOs often include stock options or stock ownership plans for
employees, providing them with an opportunity to share in the company’s success and aligning
their interests with those of the company’s shareholders.
5. Liquidity for Existing Shareholders: Going public offers liquidity to existing shareholders,
allowing them to sell their shares on the stock exchange and monetize their investments.
6. Currency for Acquisitions: Publicly traded companies can use their shares as currency for
acquisitions, making it easier to pursue growth opportunities through mergers and acquisitions.
7. Market Valuation: IPOs enable companies to establish a market valuation for their shares,
which can be used as a benchmark for future fundraising activities or as a basis for potential
mergers and acquisitions.
Overall, an IPO can be a strategic move for companies looking to raise capital, increase
visibility, provide liquidity to shareholders, and position themselves for future growth and
expansion.
1.7 How to invest in IPO In India
Investing in an IPO (Initial Public Offering) can be exciting, but it’s important to approach it with
caution. Here’s a basic guide:
1. Research: Learn about the company going public. Look into its business model, financial
health, management team, competitive landscape, and growth prospects.
2. Read the Prospectus: This document provides detailed information about the company, its
operations, risks, and financials. It’s essential reading before investing.
3. Evaluate the Price: Determine if the IPO’s valuation is reasonable compared to similar
companies in the industry. Consider factors like price-to-earnings ratio, revenue growth, and
market potential.
4. Consider Long-Term Potential: Assess whether the company has the potential for
long-term growth and profitability, rather than just short-term hype.
5. Understand the Risks: Investing in IPOs carries risks, including market volatility, lack of
historical data, and potential for loss if the company doesn’t perform as expected.
6. Consult with Financial Advisors: If you’re unsure about investing in an IPO, consider
consulting with a financial advisor who can provide personalized advice based on your financial
situation and goals.
7. Stay Informed: Keep up with news and developments related to the company and the
market to make informed decisions about your investment.
Remember, investing in IPOs can be speculative, so only invest money you can afford
to lose, and consider diversifying your portfolio to mitigate risk.
Some key words used in IPO
● DRHP –
DRHP, or Draft Red Herring Prospectus, is a preliminary document filed with
regulators by a company planning an IPO, containing key details about the company, its
operations, financials, and risks.
● Subscription –
Subscription in an IPO is the process where investors show interest in
buying shares. It indicates demand for the IPO.
● Grey Market – The Grey market in an IPO is an unofficial market where shares are
traded before official listing, providing insights into expected listing price and demand.
● Floor price – The floor price in an IPO refers to the minimum price at which shares are
offered to the public. It serves as a baseline for determining the offer price, ensuring that
the company receives a certain minimum value for its shares.
● Price band – The price band in an IPO sets the range within which investors can bid for
shares. It helps establish a fair market price for the shares being offered and allows
investors to submit bids within that range.
● Cut Off Price – The cut-off price in an IPO is the price at which shares are allotted to
investors who bid at or above this price. It’s the highest price at which an investor can
bid, ensuring fair allocation of shares.
● Lot size – The lot size in an IPO is the minimum number of shares investors can bid for
during the subscription process. It’s determined by the issuing company and represents
the smallest unit of allocation.
Conclusion
In conclusion, an IPO (Initial Public Offering) provides companies with a means to raise capital
by offering shares to the public for the first time. It allows investors to participate in the growth
potential of a company and can provide liquidity to existing shareholders. However, investing in
IPOs carries risks, including market volatility and the possibility of not receiving desired
allotments. Careful research and consideration are essential before participating in an IPO.