Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors. An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy trading of the existing assets, to raise capital for the future or to monetize the investments made by existing stakeholders.
The institutional investors, high net worth individuals (HNIs) and the public can access the details of the first sale of shares in the prospectus. The prospectus is a lengthy document that lists the details of the proposed offerings.
What is the procedure?
1- Selecting an investment bank: The first step is to select an investment bank as an underwriter. Here, the role of an investment bank is to help the company establish various details such as: 1- How much money the company hopes to raise. 2-The type of securities that will be offered. 3-The initial price per share For a large IPO, there can be multiple investment banks involved. In short, investment banks act as facilitators in the IPO process.
2-Creating the Red Herring prospectus: The next step of the IPO process is to create the ‘Red Herring Prospectus’. This is done with the help of underwriters. The prospectus includes various segments such as financial records, future plans for the company, potential risks in the market and expected share price range. Many times, underwriters go on road shows in order to attract potential institutional investors after they create the red herring prospectus.
3- SEBI approval: The prospectus is presented to the Securities and Exchange Board of India (SEBI). If SEBI is satisfied, it green-lights the initial public offering (IPO) process. In addition, it also gives a date and time for the IPO. But in case SEBI is not satisfied, it asks for changes to be made before the prospectus can be shared with public investors.
4- Stock exchange approval: Listing is the process where securities are allowed to deal on a recognized stock exchange. But for that to happen, the company needs to be approved by the exchange. For instance, the Bombay Stock Exchange (BSE) has a listing department whose purpose is to grant approval for securities of companies. The BSE has a list of criteria which needs to be followed for the company to be listed on its exchange.
For example: 1- The minimum issue size should be Rs 10 crore. 2-The minimum market capitalization of the company should be Rs 25 crore. 3- The minimum post issue paid-up capital of the company should be Rs 10 crore.
Only if the company follows these criteria, it gets an approval from the BSE.
5-Subscription of shares: Once all the formalities are done, the company makes the shares available to investors. This is done on the dates specified in the prospectus. Investors who wish to apply for shares have to fill out and submit the IPO application form.
6-Listing: The shares are allotted to different investors based on the demand and price quoted in their IPO application forms. Once this is done, investors get the shares credited to their demat account. In case of oversubscription (if the demand for shares is higher than the number of shares floated by the company), investors may not get the number of shares they originally wanted. They may get fewer shares after a lottery is done. Some investors may not even get any shares. In such cases, these investors get a refund of their money.
Some of the IPO’s that have came in the year 2020 are- CAMS IPO, Chemcon IPO, Route Mobile IPO, Rossari Biotech IPO, Happiest Mind Technologies IPO.
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