Demystifying the IPO Process: A Simplified Guide to Taking Your Company Public

We will unravel the intricacies of the Initial Public Offering (IPO) journey, offering you a clear roadmap to transform your private company into a publicly traded entity. Whether you’re a startup founder, an executive in an established firm, or an investor seeking to understand the IPO landscape, this guide will provide valuable insights into the steps, strategies, and considerations involved in this pivotal financial milestone. Join us as we demystify the IPO process and empower you with the knowledge to navigate this transformative path successfully.

IPO Process (Step by Step Guide)

Companies must adhere to the IPO procedures set by the respective stock exchanges for listing their shares post-IPO. In India, the IPO procedure entails the following steps:

• Appointment of Merchant Banker (Lead Manager)
  • The company appoints a Merchant Banker (Lead Manager) to guide them through the IPO process, from due diligence to post-listing support.
  • The Merchant Banker plays a pivotal role in orchestrating the entire IPO process and liaises with all stakeholders involved.
• Note:
  • Companies may appoint one or more merchant bankers, with multiple lead managers being common for large IPOs.
  • Merchant bankers are SEBI-registered financial institutions providing various financial services, including fund raising, advisory, underwriting, and more.
• DRHP Approval from SEBI
  • The company, along with the merchant banker, conducts due diligence and prepares the Draft Red Herring Prospectus (DRHP).
  • The DRHP document is then submitted to SEBI for review, a process that typically takes 2 to 4 months.
  • SEBI reviews the DRHP content and grants the necessary approvals.
• Note:
  • SME IPOs do not require SEBI approval but must gain approval from the stock exchange.
• IPO Application to Exchanges
  • Merchant bankers submit the IPO application along with the DRHP document to the stock exchanges for approval.
  • The stock exchange provides initial approval to the company after reviewing the IPO application.
• Price Determination
  • The issuer and the merchant banker jointly decide on the IPO pricing method: fixed-price issue or book-building issue.
  • In a fixed-price offering, the price at which shares are sold and allotted is disclosed to investors before the IPO.
  • In a Book Building Issue, the issuer sets a price range (e.g., Rs 80 to 90) or a 20% price range within which investors can place bids.
  • The final price is determined upon completion of the bidding process, with both retail and institutional investors invited to participate.
• RHP Submission
  • A Red Herring Prospectus (RHP) is created and submitted to the Exchange(s).
  • The RHP serves as an updated version of the DRHP and contains the most recent financial data along with additional details such as the IPO timeline and pricing information, enabling investors to make informed decisions.
• Road Show
  • The IPO is advertised to the public in coordination with PR and advertising agencies, a process known as an IPO roadshow.
  • Investor meetings are organized in various cities, featuring the company’s promoters.
  • Meetings with journalists, analysts, and other media representatives are also arranged.
• IPO Opens for Anchor Investors
  • The IPO becomes accessible to anchor investors (if applicable), who are qualified institutional buyers (QIBs).
  • Anchor investors submit bids for a minimum of Rs 10 crore, and shares are allotted to them one day before the public offering opens.
• IPO Opens for Public
  • The IPO is made available to the general public for bidding on shares.
  • The offering duration typically ranges from three to ten days.
  • During this period, investors bid for the available shares, with no guaranteed allocation as shares are often allotted through a lottery system.
  • Investors receive unique IPO application numbers.
• IPO Shares Allotment
  • Following the closure of the public offering, the exchange forwards application data to the IPO registrar, responsible for allotment.
  • The exchange provides the IPO application file to banks to verify that the bank and demat accounts used in the application match.
  • Applications flagged as “3rd party” are rejected by the registrar.
  • Allotment is conducted either through a lottery or on a pro-rata basis as applicable.
  • Funds are deducted from investors’ accounts, and shares are transferred to their demat accounts.
• IPO Listing Date Announcement
  • The company submits listing documents to the stock exchange.
  • A credit confirmation from the depository, indicating successful share transfer to allottees’ accounts, is sent by the company.
  • The stock exchange releases a listing circular the following day, containing details such as the final price, ISIN, code, and symbol.
• IPO Shares Listing
  • Trading of IPO shares is initiated on the stock exchanges through two stages:
    a. Pre-open Session
    • A 45-minute session (9:00 a.m. to 9:45 a.m.) dedicated to newly listed shares, aimed at determining their opening price.
    • During this time, orders can be entered, modified, or canceled.
    • Between 9:45 a.m. and 9:55 a.m., orders from the first 45 minutes are matched, establishing the IPO’s opening price.
  • b. Commencement of Trading
    • Normal trading in IPO shares starts at 10 a.m. on the listing day, allowing anyone to buy or sell these shares on the market.
• Post-Listing Documents
  • Following the listing, the issuer is required to submit various documents to the stock exchange, including board meeting invitations, annual reports, shareholding samples, audit reports, corporate governance reports, and further audit reports. These documents help ensure transparency and compliance with regulatory requirements.

Comparison of mainboard & SME IPO processes :

While the IPO processes for Mainboard and SME IPOs share significant similarities, there are some minor distinctions to be aware of:

• Regulatory Review:
  • In the case of Mainboard IPOs, the IPO documents are reviewed by SEBI (Securities and Exchange Board of India), the national regulatory authority.
  • Conversely, for SME IPOs, the IPO documents undergo review by the respective stock exchange where the company intends to list, rather than SEBI.
• Market Maker Requirement:
  • A noteworthy difference is the requirement of appointing a Market Maker in SME IPOs.
  • In SME IPOs, the issuer company, along with the merchant banker, is obligated to jointly appoint a Market Maker.
  • In contrast, Mainboard IPOs do not typically require the appointment of a Market Maker.
• RHP Document Filing:
  • For fixed-price SME IPOs, it is mandatory to file the Red Herring Prospectus (RHP) document with the Registrar of Companies (RoC) before the issue opens for subscription.
  • In the case of Mainboard IPOs, particularly those following the book-building method, the RHP can be filed after the closing of the issue.

IPO Process Timeline in India:

The timeline for the IPO process in India can span from 3 months to up to a year, contingent upon several influential factors. These factors include:

• Type of IPO: The choice between a Mainboard IPO and an SME IPO can affect the timeline due to varying regulatory requirements.
• Transaction Complexity: Complex transactions may require additional time for due diligence, approvals, and compliance.
• Company Size: The size and financial intricacies of the company play a role in determining the IPO timeline.
• Market Situation: Market conditions, including volatility and investor sentiment, can impact the timing of the IPO.
• Regulatory Processes: The duration may vary based on regulatory approvals and reviews by authorities like SEBI (Securities and Exchange Board of India).

IPO Process Timelines by IPO Platform (Tentative)

• Mainboard IPO: Typically spans from 6 to 12 months.
• SME IPO: Generally takes around 3 to 4 months.

IPO Process Timelines by Stages (Tentative)

• Planning: Approximately 2 weeks are allocated for planning the IPO.
• Due diligence: Usually, a period of 4-5 weeks is dedicated to due diligence processes.
• DRHP Preparation: Around 1 week is required for the preparation of the Draft Red Herring Prospectus (DRHP).
• SEBI Approval: Typically takes between 4-8 weeks for SEBI to review and provide approval.
• RHP Submission: Takes approximately 2-3 weeks for the submission of the Red Herring Prospectus (RHP).
• IPO Launch: A minimum of 3 days is needed for the IPO to be open for subscription.
• Allotment: Allotment of shares is usually done within 3 days after the issue’s closure.
• Listing: Companies are listed on stock exchanges approximately 6 days after the closing date of the IPO.
• Post-issue activities: Post-issue activities and formalities are generally concluded in 2-3 weeks.

These timelines provide a tentative overview of the various stages and durations involved in the IPO process in India, which can vary based on specific circumstances and regulatory requirements.

FAQS:

Q1: What is an IPO, and why should a company consider going public?

A1: An IPO, or Initial Public Offering, is the process through which a private company offers its shares to the public for the first time. Companies consider going public to raise capital for expansion, repay debts, enable early investors to exit, and enhance credibility in the market.

Q2: What are the main benefits of taking a company public through an IPO?

A2: Going public offers benefits like access to capital, liquidity for shareholders, enhanced visibility, branding opportunities, and the ability to use shares for acquisitions or employee incentives.

Q3: What are the eligibility criteria for a company to go public in India?

A3: Eligibility criteria vary for Mainboard and SME IPOs. Mainboard IPOs require a minimum paid-up capital of Rs 10 crores and meet SEBI profitability norms, while SME IPOs have a maximum post-issue paid-up capital of Rs 25 crores and follow relaxed eligibility norms.

Q4: What are the key IPO pricing methods, and how do they differ?

A4: The main IPO pricing methods are Book Building and Fixed Price. Book Building allows investors to bid within a price range, with the final price determined based on demand. Fixed Price sets a predetermined price for all shares, chosen by the issuing company.

Q5: How long does the IPO process typically take?

A5: The IPO process can take several months, including preparations, approvals, and the actual offering. The timeline may vary based on regulatory requirements and market conditions.

Conclusion:

Taking your company public through an IPO can be a significant milestone in its growth journey. While the process may seem complex, this guide has aimed to demystify it and provide you with a simplified overview of the steps involved. From understanding the advantages and disadvantages to meeting eligibility criteria and selecting the right pricing method, you now have a foundational understanding of what it takes to go public.

Remember that each IPO is unique, and seeking professional advice and guidance from financial experts, legal advisors, and underwriters is crucial. By carefully navigating the IPO process, you can access the capital markets, raise funds, and expand your company’s horizons, ultimately unlocking new opportunities for growth and success.