How IPOs Work: A Step-by-Step Guide to Company Listing
An Initial Public Offering (IPO) occurs when a private business sells its shares to the public for the first time. In the process, the business is listed on a stock exchange, and investors are able to purchase its shares. An IPO enables the business to raise funds for expansion purposes while enabling the investors to become co-owners of the company. It also increases the visibility and trust of the company in the market.
How Does IPOs Work
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 Choose to Go Public through an IPO?
Businesses usually opt for going public via an IPO because it has several advantages. The primary advantage is capital raising. By issuing shares to the public, businesses receive funds to invest in expansion, research, technology, or debt reduction.
Another reason is increased credibility. Listing on a stock exchange instils greater trust among customers, partners, and investors. It brings the brand more to the forefront of the industry and tends to attract better employees.
An IPO also provides liquidity to existing shareholders such as early investors, founders, and employees. They can sell part of their stocks in the open market and make profits.
Going public enables the company to determine a market value for itself. This way, it is easier to raise money in the future through new issues, bonds, or any other instrument. Although the IPO process involves strict adherence to guidelines, the long-term benefits make it a suitable option for most companies.
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Frequently Asked Questions
The IPO process in India, on average, takes four to six months. This involves document preparation, regulatory approvals, investor roadshows, and finally listing the shares on the stock exchange. To participate, investors must open Demat account first.
The IPO price is set using two methods. In the fixed price method, a single price is decided beforehand. The book-building method is employed where a range of prices is fixed, and bids from investors decide the final price. Once the price is set, you can apply for IPO through your broker or platform like Findoc.
The Indian IPO process is governed by the Securities and Exchange Board of India (SEBI). They make sure that companies disclose all necessary information and that investors can get a fair and transparent deal.
Yes, SEBI regularly modifies rules to safeguard investors and enhance transparency. The recent changes include more stringent disclosure norms, lock-in periods for promoters, and regulations to cut the possibility of fund misuse by IPO companies.
There are mainly two types of IPOs. A fixed price issue where the price is decided in advance, and a book-building issue where a price range is given and the final price is discovered based on investor demand.
In India, companies must meet specific criteria such as having net tangible assets of at least three crore rupees, profits in recent years, and a minimum paid-up capital before they can apply for an IPO.