How IPOs Work: A Step-by-Step Guide to Company Listing
Taking a company public through an IPO (Initial Public Offering) is a big step and helps in getting the company listed in the stock market. Here’s an easy-to-follow explanation of how does an IPO work:
1. Planning and Getting Approval from Regulators
The first step is creating a clear plan for going public. This plan explains why the company wants to go public, how it will use the money raised, and its market goals.
Next, the company hires underwriters (usually investment banks) to guide them. Together, they prepare key documents, like the Red Herring Prospectus (RHP), and submit them to the Securities and Exchange Board of India (SEBI) for approval. This ensures the company follows all rules and gives investors all the important details about the IPO.
2. Setting the Price and Spreading the Word
After SEBI’s approval, the company and underwriters decide on the price band (the range in which shares will be sold) and the lot size (the minimum number of shares investors can buy).
They then promote the IPO through a marketing campaign, where they showcase the company’s strengths and growth plans to potential investors.
3. Investors Place Bids
During the IPO period, investors can place bids for shares within the price band. This is called the book-building process, which helps gauge demand for the shares. The underwriters collect these bids from various groups like retail investors, institutional investors, and high-net-worth individuals to understand market interest.
4. Finalizing the Price and Distributing Shares
Once bidding closes, the final price is set based on the demand. Shares are then allocated to investors. If there’s high demand (oversubscription), shares are distributed proportionally or through a lottery system.
5. Listing on Stock Exchanges
After the shares are allocated, the company lists them on stock exchanges like NSE or BSE. On the listing day, the shares start trading in stock market, and the company officially becomes public. From this point, anyone can buy or sell the shares in the open market.
This process allows companies to raise funds for growth and gives investors a chance to own a piece of the business.
Why Do Companies Offer IPOs?
Companies launch IPOs to raise money for growth, pay off debt, invest in new technology, or save for future needs. It also allows early investors and employees to cash out their shares. Additionally, being public improves the company’s reputation, transparency, and access to more funds in the future, benefiting everyone involved.
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