20-Jan-2024

What is an IPO?

IPO stands for Initial Public Offering. It is the process by which a private company offers its shares to the public for the first time, allowing it to become a publicly traded company. By going public, the company can raise capital by selling shares to investors, which can be used for business expansion, acquisitions, or other purposes. IPOs allow investors to buy shares in a company and potentially profit from its growth.

IPO Process in Brief

1. Filing Application with SEBI (Securities and Exchange Board of India): The company intending to go public submits an application with SEBI, providing comprehensive details about the IPO, including the number of shares to be issued, company history, financial records, and the intended use of the raised funds.

2. Red Herring Prospectus (RHP): Upon receiving approval from SEBI, the company prepares and releases a Red Herring Prospectus. This document provides detailed information about the company's business, operations, financials, risks, and the IPO. It's called "red herring" because certain key details, such as the IPO price, are not finalized at this stage. This document also includes the issues' opening date and closing date.

3. Engaging a Lead Manager: The company selects a lead manager or multiple managers (often an investment bank or brokerage) to oversee the IPO process. These managers assist in pricing the IPO, marketing it to potential investors, and managing the offering.

4. Soliciting Bids: The lead manager starts the process of soliciting bids from institutional investors and, in some cases, retail investors. They gauge the interest in the IPO and collect bids or expressions of interest from investors indicating the quantity of shares they wish to purchase and the price they are willing to pay.

5. Subscription and Allocation: Once the IPO goes live, investors can subscribe to the offering through their brokerage firms or financial institutions. They specify the quantity of shares they want and the price they're willing to pay. The allocation of shares is based on demand, with priority often given to institutional investors.

6. Allotment and Crediting Shares: After the IPO subscription period ends, the shares are allotted to the successful bidders. The allotted shares are then credited directly to the demat (dematerialized) accounts of the investors who were successful in obtaining shares.

This process allows companies to raise capital from the public markets and gives investors an opportunity to own a stake in the company. The IPO process is highly regulated and involves collaboration between the company, regulatory bodies like SEBI, underwriters, lead managers, and potential investors.